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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 000-29739
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REGISTER.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3239091
(State of incorporation) (I.R.S. Employer identification number)
575 Eighth Avenue, 11th Floor
New York, New York 10018
(212) 798-9100
(Address, including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.0001 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of voting stock held by non-affiliates of
the registrant as of March 28, 2001 was approximately $153,798,000 (based on the
last reported sale price on the NASDAQ National Market on that date). The number
of shares outstanding of the registrant's common stock as of March 28, 2001 was
37,010,755.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2001 Annual
Meeting of Stockholders, which is to be filed subsequent to the date hereof, are
incorporated by reference into Part III.
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REGISTER.COM, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I............................................................................................................1
Item 1. Business........................................................................................1
Item 2. Properties......................................................................................41
Item 3. Legal Proceedings...............................................................................41
Item 4. Submission of Matters to a Vote of Security Holders.............................................41
PART II...........................................................................................................42
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...........................42
Item 6. Selected Financial Data.........................................................................43
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation............44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................55
Item 8. Financial Statements and Supplementary Data...................................................F-1
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............57
PART III..........................................................................................................57
Item 10. Directors and Executive Officers of the Registrant.............................................57
Item 11. Executive Compensation.........................................................................57
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................57
Item 13. Certain Relationships and Related Transactions.................................................57
PART IV...........................................................................................................57
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................57
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT OUR BUSINESS AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS SECTION AND ELSEWHERE IN THIS REPORT. WE UNDERTAKE NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
PART I
Item 1. Business.
Overview
We are a provider of Internet domain name registration products and
services worldwide for businesses and individuals that wish to have a unique
address and branded identity on the Internet. Domain names serve as part of the
infrastructure for Internet communications, including websites, email, audio,
video and telephony.
As the first registrar to compete in the domain registration market
after the U.S. government deregulated the industry, we have processed over 3.7
million domain registrations since June 1999. Currently, we directly register
domain names across the generic top level domains (gTLDs) .com, .net and .org
and we also register domain names in over 240 country code domains (ccTLDs),
such as .co.uk and .org.uk for the United Kingdom, .de for Germany and .jp for
Japan.
We believe that we offer a quick and user-friendly registration process
as well as responsive and reliable customer support. We also offer a suite of
value-added products and services targeted to assist our customers in developing
and maintaining their online identities, including:
Products and Services Products and Services
Provided by Us Provided by Others
o real-time domain name management o email
o website-creation tools under the name o web hosting
FirstStepSite
o domain name forwarding o digital certificates under the name
CommerceLock
o domain name re-sale services, such as auctions, o trademark monitoring under the name Trademark
appraisals and escrow services, offered Guardian
through our subsidiary Afternic.com
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Our mission is to become the preferred partner for customers who seek
to create, enhance and manage their commercial Internet presence. Our retail
customer base is comprised of small to medium size businesses as well as SOHOs
(Small Office/Home Office) and individuals. These customers purchase domain name
registration services directly from our website at www.register.com. We also
sell domain name registration products and services to enterprises with high
volume registration needs through our Corporate Services Division. In addition,
to extend our distribution we maintain a Global Partner Network of over 650
ISPs, web-hosting companies, telecom carriers, web portals and other web-based
businesses. Using our flexible software solutions, these companies resell our
domain registration and related products and services to their customers.
We are the successor by merger to Forman Interactive Corp. Forman
Interactive commenced operations in 1994 as a developer of electronic commerce
software, and began offering web-hosting and related products and services in
1997. In February 1998, we began to distribute domain names either for free or,
to a lesser extent, were paid commissions for the domain names we distributed
for international registrars and registries. In April 1999, we commenced
offering registration services for country code domains and in June 1999, we
began operating as a paid registrar in the .com, .net and .org domains.
In June 2000, we acquired Inabox, and we use their software in our
FirstStepSite product and BestSRS, one of the reseller solutions offered to our
Global Partner Network. In September 2000, we acquired Afternic.com, a leading
secondary market exchange for domain names to capitalize on the increasing
convergence between the primary and secondary domain name markets.
Through RegistryPro, a joint venture with the U.K.-based registrar
Virtual Internet plc, we are establishing a registry for the new gTLD .pro,
which will be dedicated to certified professionals such as lawyers, doctors and
accountants. We also have an equity stake in Afilias, a consortium of 18
registrars, which was selected to run the registry for the new gTLD .info. We
currently expect each of these new registries to launch in the second half of
2001, although their launch is dependent on finalizing contract negotiations
with the Internet Corporation for Assigned Names and Numbers and is not assured.
Domain Name Registration System
The Internet domain name registration system is composed of two
principal functions: registry and registrar. The registry maintains the database
that contains the domain names registered in the top level domains and their
corresponding Internet protocol addresses. The registrar acts as an intermediary
between the registry and individuals and businesses, referred to as registrants,
seeking to register domain names.
The domain name system is organized according to industry custom by
levels, so that, for example, in the domain name mybrand.com, .com is the top
level domain and mybrand is the second level domain. Top level domains are
classified as either generic (gTLDs) or country code (ccTLDs). Currently, the
most common gTLDs are .com, .net and .org and we anticipate the introduction of
new gTLDs in the second half of 2001.
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There are over 350 different country code top level domains, such as
.co.uk and .org.uk for the United Kingdom, .de for Germany and .jp for Japan
representing over 240 countries. Each registry for country code domain names is
responsible for maintaining and operating its own database of registered domain
names. Some country code domains are unrestricted and allow anyone, from
anywhere, to register their domain names on a first-come, first-served basis.
Others require that prospective registrants have a local presence in the country
to be able to register domain names in that country. While there have been
movements directed at creating uniform domain name registration rules and
registrar administration guidelines, to date there has been no international
uniformity.
From January 1993 until April 1999, Network Solutions, now a part of
VeriSign, Inc. was the sole entity authorized by the U.S. government to act as
registrar and registry for domain names in the .com, .net and .org top level
domains. VeriSign continues to act as sole registry for the .com, .net and .org
domains, maintaining the files in the Shared Registration System for these
domains and the directory databases listing these domain names and their
numerical addresses.
In October 1998, the Department of Commerce called for the formation of
a non-profit corporation to oversee the management of the .com, .net and .org
domains and in November 1998, the Internet Corporation for Assigned Names and
Numbers, commonly known as ICANN, was recognized as this non-profit corporation.
In April 1999, as a preliminary step to introducing competition into the domain
name registration system for .com, .net and .org domains, ICANN selected us as
one of five registrars to participate in a testbed to evaluate whether the
Shared Registration System could accommodate multiple registrars. On June 2,
1999, we were the first of these five competitive registrars to launch our
registration services. On November 30, 1999, the testbed was completed, and all
registrars meeting ICANN's standards for accreditation were permitted to
register domain names in the .com, .net and .org domains. As of March 16, 2001,
there were 148 ICANN-accredited registrars of which only 75 are connected to the
Shared Registration System and offering registrations.
In November 2000, ICANN approved bids for the following seven new gTLD
registries: .biz, .info, .pro, .name, .museum, .coop and .aero. These
prospective gTLD registries are currently in the process of negotiating
contracts with ICANN and, while there can be no guarantee that they will
successfully launch, based on actions taken by the ICANN board at its March 2001
meeting in Melbourne, Australia, we currently expect at least four of the new
gTLDs (.biz, .info, .name and .pro) to commence selling registrations through
registrars in the second half of 2001.
Also in November 2000, the .com, .net and .org registry launched a
testbed through which it began to accept multilingual domain name registrations
(domain names using non-Roman characters). Initially, the testbed accepted
registrations in the Japanese and Korean character sets and in two Chinese
character sets. In February 2001, the registry expanded the testbed to accept
registrations in additional languages including French, German, Spanish and
Russian. Additional character sets are expected to be added to the testbed in
April 2001.
For a more detailed discussion of the regulatory background of the
domain name registration system, see "Administration of the Internet; Government
Regulation and Legal
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Uncertainties." For risks associated with the domain name system generally and
new gTLDs and multilingual domain names specifically, see "Risk Factors."
Domain Name Registration Market
As a result of the continuing growth of and convergence to the Internet
and the development of the domain name registration industry (including the
introduction of new gTLDs), we believe that the market for domain name
registrations will continue to grow. Domain name registration activity is driven
by numerous factors including:
Corporations. As a result of the significant growth in electronic
commerce, as well as the increasing focus on the global promotion and protection
of their corporate identities, corporations will continue to be significant
users of domain name registration services.
Small offices and home offices. As small offices and home offices
increasingly move their businesses online, demand for domain name registration
and related online products and services will increase.
Individuals. As more people begin to use the Internet and as online
activities become a greater part of family communications and identities, they
will want to establish their own unique presence on the Internet.
Further, we believe that businesses will use domain names for a number
of distinct purposes, including:
Products and services. Registering products and services as domain
names and establishing web identities related to particular products and
services, which are key components of a global promotional, marketing and brand
protection strategy.
One-time events. One-time events, such as sporting events and
elections, which represent additional domain name registration opportunities as
sponsors increasingly turn to the Internet to differentiate and promote their
events.
The Register.com Solution
We offer products and services that assist businesses and individuals
in creating, managing and enhancing their Internet presence. We believe that our
industry experience and ability to anticipate and respond to the needs of our
customers have positioned us to capitalize on the growing market for domain name
registration and related products and services. Our competitive advantages
include:
Substantial Industry Experience. We have been active in the domain name
registration industry since February 1998, when we began offering domain names
to customers throughout the world. We were one of five registrars selected by
ICANN to participate in the testbed process and, in June 1999, were the first of
these registrars to register domain names in the .com, .net and .org domains
directly on behalf of customers. Our experience in providing a consumer
interface for registrations prior to June 1999, our participation in the testbed
and our involvement with the development of ICANN's policies contribute to our
substantial operational experience
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in, and knowledge of, the domain name registration industry. Most recently, this
experience guided us successfully through the ICANN process which evaluated
proposals for new gTLDs, as each of the two proposals for new registries in
which we participated, RegistryPro (.pro) and Afilias (.info), were selected.
Customer Service Focus. Our customer support group seeks to provide
dependable and timely resolution of customer inquiries, 24 hours per day, seven
days per week. We manage and respond to customer inquiries through our
internally developed Internet-based customer care tracking system and our
customer service telephone system. As a result of our ongoing training, we have
teams of customer service representatives who specialize in key aspects of our
business, and who are skilled in describing and assisting our customers with our
products, services and technology. In May 2000, we upgraded our customer care
center to provide enhanced customer service and customer support, and we expect
to complete additional expansion and improvements to our customer service
operations in 2001.
Value-Added Products and Services. We have assembled a suite of
targeted products and services to assist our customers with managing and
enhancing their online identities. In addition to our quick and easy-to-use
domain name registration services, we offer a range of value-added products and
services that we provide or that are provided by third parties, including
advertisers. These products and services include real-time domain management,
template-driven website building tools, domain name forwarding, email, web
hosting, digital certificates and trademark protection and monitoring services.
We also offer services to participants in our Global Partner Network to enable
them to manage their customers' domain names.
Broad and Efficient Distribution Channels. We believe that our direct
and indirect distribution channels enable us to reach a broad range of potential
customers with products and services targeted to their needs and to increase our
exposure across the market. We sell our domain name registration services
directly to our customers, primarily through our www.register.com website and
dedicated Corporate Services account managers. To extend our distribution, we
also offer services indirectly through our Global Partner Network. This network
currently consists of over 650 ISPs, web-hosting companies, telecom carriers,
web portals and other web-based businesses, including over 125 based outside the
United States, that resell our domain registration and related products and
services to their customers using our flexible software solutions.
Secondary Market Products and Services. Through Afternic.com, which we
acquired in September 2000, we offer a comprehensive suite of products and
services for the secondary market for domain name registrations including,
auctions, appraisals and escrow services. Afternic.com also provides its members
with industry newsletters and the ability to participate in community forums. We
believe that we will see increasing convergence between the primary and
secondary markets over time and that Afternic.com will provide us with the
platform to participate in the resultant opportunities. An example of such
convergence is Afternic Virtual Broker, an automated service that makes it
possible to bid on any name already registered while going through the
register.com registration process.
Scalable, Reliable and Secure Technological Platform. We designed and
developed our technological infrastructure with a view toward ensuring the
scalability, reliability and security
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essential to support the growth expected in the domain name registration
industry. Our selection by ICANN as a testbed registrar and the selection of
RegistryPro as a new gTLD registry, were, we believe, based in significant part
on our technological plans.
The Register.com Strategy
Our objectives are to increase our share of high quality domain name
registrations, to differentiate our products and services and to develop a
long-term relationship with our customers by helping them to create, enhance and
manage their commercial online presence. Our key strategies for achieving these
objectives include:
Introducing New Products and Services. We will continue to introduce
new "best of breed" products and services in order to empower our customers as
they manage and enhance their online presence. The products and services we have
introduced this year include:
o FirstStepStarter Kit, our bundled product offering, which
provides our customers with the following products and
services to start a web presence: (1) a domain name
registration, (2) FirstStepSite, a three page template-driven
web site, (3) email and (4) domain name forwarding;
o SiteSubmit, a service that facilitates the submission of
domain names to up to 400 search engines;
o Customized Registration Portal, a web-based application which
allows our Corporate Services clients to provide their
employees with managed registration capability through a
customized password protected interface.
o CommerceLock, a digital certificate offering.
We expect to provide domain name registration services for the
unsponsored new gTLDs (.biz, .info, .name and .pro) as well as additional
multilingual domain names when and if they become available in the marketplace.
As the domain name market matures, and our renewal and transfer efforts become
increasingly important to increasing the lifetime economic value of our customer
base, we are committed to making our automated transfer and renewal services
more efficient and easier to use. Finally, we will continue to expand the number
of country codes in which our customers can register domains through us
(currently over 240) so that we can help them meet their global needs.
As part of this strategy, we will try to anticipate our customers needs
and to meet them by entering into new business alliances, developing new
applications and website features and investing in our technologies. We believe
that these enhancements will increase traffic to our website and strengthen
customer loyalty, as well as position us as a preferred registrar for ISPs,
web-hosting companies and other companies whose products and services may appeal
to our target customers.
Renewal Efforts. Encouraging our customers to renew their domain name
registrations with us is of great importance as their renewals will allow us to
increase profitability by lowering overall marketing costs. To strengthen our
renewal efforts we are developing retention-based
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programs and have launched services such as QuickRenew, a one-step renewal
process and SafeRenew, our automatic renewal service. In addition, over time, we
believe that our focus on customer service and the adoption by our customers of
our additional products and services will have a positive impact on renewals.
Targeting Marketing to the Most Profitable Customer Segments. In 2000,
we believe we were successful in our marketing efforts to build our brand
awareness and reputation. While we will continue these efforts in 2001, we are
increasingly focusing our marketing efforts on attracting and retaining
registrants who are more likely to renew their names and to take advantage of
our additional products and services. By focusing on the quality of our customer
base, as opposed to the volume of domain name registrations, we believe we will
succeed in increasing the lifetime value of our customers.
Expanding Internationally. We are expanding our relationships with
foreign ISPs and other foreign companies in order to offer our products and
services to the growing international Internet market. We also intend to pursue
alliances and to create local language websites to provide domain name
registration and value-added products and services to non-English speaking
people.
Pursuing and Integrating Acquisitions and Investments. We intend to
selectively pursue acquisitions of, and investments in, companies, including
other domain name registrars and developers of web-based applications and
services. We will target companies that offer complementary products, services
and technologies that can expand our business into the products and services
that will fill our customers needs.
Products and Services
Registration Services. Our core expertise is providing domain name
registration services. We register domain names in the .com, .net and .org
domains and are able to register domain names in over 240 country code domains,
of which 29 may currently be registered through our www.register.com website. We
offer .com, .net and .org multilingual registrations in 46 different character
sets including German, Italian, French and Japanese, and we expect to increase
these offerings. We are currently taking indications of interest for
registrations in the new gTLDs (.biz, .info, .name, .pro, .museum, .aero and
.coop) some of which we expect will launch in the second half of 2001. We expect
to provide registration services for these names when and if they are launched.
We offer one-, two-, five- and ten-year registration periods for both the
initial and renewal domain name registration in the .com, .net and .org domains.
We provide the following basic products and services, for no additional fee,
together with our registration services:
o FirstStepSite. We provide customers who have registered domain
names through us the ability to create a three-page website
and post it on the Internet. Customers can select from a
multitude of layouts, themes and colors and also upload images
to customize their FirstStepSites. As of December 31, 2000,
our customers had set up over 200,000 FirstStepSites.
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o FutureSite. For customers who do not take advantage of
FirstStepSite, we provide a presence on the Internet
immediately following registration until they launch their own
website. Entering a customer's new domain name will bring up a
webpage stating: "Coming Soon! We recently registered our
domain name at register.com."
o Domain Manager. This quick and easy-to-use service enables our
customers to view and modify important domain name information
online, on a real-time basis, including their email address,
the location of the server that hosts their website and all
billing information, as well as enable customers to renew
their registrations.
o One-Step Registration and QuickRenew. We provide our existing
users the ability to register additional domain names or renew
an existing name through a one-step process using Domain
Manager.
o Domain FastFind. This application, based on key word searches,
helps potential registrants find alternatives if their desired
domain is already taken.
o Multi-Name Registration. This application allows customers to
register up to 30 domain names simultaneously.
Domain Name and Registrar Transfers. We facilitate the processing of
domain name transfers between registrants. Also, if we were not the original
registrar for a customer's domain names, we will facilitate our designation as
the new registrar for those domain names through an automated process.
Corporate Services. Through our Corporate Services division, we offer
an array of products and services to assist these customers with high volume
registration, brand protection and security needs including:
o Multiple Domain Registrations and Transfers. We make it easy
for customers to register and transfer large numbers of domain
names, typically greater than 250 per customer.
o International Brand Protection. We are able to register domain
names in over 240 country code domains, thereby assisting
customers in protecting and marketing their brands worldwide.
o Billing Consolidation. We provide customers a single
consolidated billing statement for all of their domain name
services.
o Domain Round-Up. We assist customers in searching for all the
domain names affiliated with their company and brands. Once
they maintain a single portfolio of domain names with us as
the registrar, we can assist customers in managing these names
more efficiently.
o Account Masking. We enable corporate customers to register
domain names with anonymity so that they can confidentially
secure a name for a product, service or idea before it comes
to market.
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o Customized Registration Portal. We provide a web-based
application which allows corporate clients to provide their
employees with managed registration capability through a
customized password protected interface.
o Trademark Guardian. We provide brand-holders with monthly
alerts of potentially conflicting trademark and domain name
activity from relevant sources around the world.
o Domain Lock Down. We offer domain name security services that
"lock" names at the registry level, which significantly
reduces the risk of unauthorized alterations to key registrar
information and blocks the deletion of a domain name for the
duration of the registration term.
Afternic.com. Through our recently acquired subsidiary Afternic.com we
offer a comprehensive suite of products and services for the secondary market
for domain name registrations including, auctions, appraisals and escrow
services. We have begun to integrate Afternic.com services with our registration
services so that customers searching for domain names can seamlessly get access
to the names available for auction on the Afternic.com website. Another example
of the convergence of the primary and secondary markets is Afternic Virtual
Broker, an automated service that makes it possible to bid on any name already
registered while going through the required register.com process.
Online Products and Services. We offer value-added products and
services, some of which we provide and some of which are provided by third
parties including advertisers. These products and services include:
o Email. We resell comprehensive email services to our
customers. These email services enable our customers to use
their unique domain names to create branded email addresses,
such as myname@mybrand.com.
o Web-hosting. We offer web-hosting to our customers primarily
by referring them to the offerings of our advertisers.
o Digital Certificates. We offer digital certificates to our
customers under the name CommerceLock to provide the security
connection necessary to conduct e-commerce with confidence.
o Domain Name Forwarding. Our domain name forwarding service
allows customers to point their domain names to existing sites
on the Internet. We offer three levels of service, one of
which is offered for no additional charge.
o Search Engine Submission. Our SiteSubmit service facilitates
the submission of domain names to up to 400 search engines.
o DNS Services. We are responsible for managing the Domain Name
Servers (DNS) for approximately 2.8 million domain names which
we believe positions us as the largest authoritative DNS
provider in the world. DNS provides the Internet and Internet
users with authoritative routing information for domain names.
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In addition, we pursue advertisers for our websites to offer additional products
and services that are complementary to our own offerings and appeal to our
customers. These include:
o trademark services;
o incorporation services;
o online marketing;
o computer hardware and equipment; and
o virtual intranet applications for the small office and home
office market.
Customer Service
We believe that our ability to establish and maintain long-term
relationships with our customers depends, in part, on the strength of our
customer support operations and staff. Furthermore, we value frequent
communication with and feedback from our customers in order to continually
improve the quality of care provided by our customer service representatives.
Our customer service representatives handle general inquiries, investigate the
status of orders and payments and answer technical questions about the Internet
and domain name management. We handled over 90,000 customer inquiries in
February 2001.
Our technology team developed our Internet-based customer service
inquiry tracking system, which we use to respond to a significant portion of our
customer service inquiries. This system enables our customer service
representatives to access customer account information efficiently, including
all past requests and our responses. Additionally, based on information provided
by our customers at the time of their inquiry, our system automatically routes
the inquiry to the appropriate team of customer service representatives. This
system also allows our management to monitor the efficiency and effectiveness of
our representatives. We solicit feedback from our customers by emailing
quality-of-service surveys to them after we have resolved their inquiries. We
analyze the survey results on a quantitative and qualitative basis. These
responses provide us with real-time feedback on the quality of our customer
service.
In May 2000, we upgraded our customer care center to provide enhanced
customer service and technical support, including a complementary online and
telephone ticketing system, a new toll-free call-in number, and an increased
staff, to provide faster and more specialized attention to customer inquiries.
In addition, with the launch of our Register.com Espanol website, we have added
a team of Spanish-speaking customer service and technical support
representatives, accessible 24 hours a day, seven days a week, in order to
provide our Spanish-speaking customers the same level of service as we provide
our English-speaking customers. We expect to complete additional expansion and
improvements to our customer service operations in 2001.
Distribution
We believe that our direct and indirect distribution channels enable us
to reach a broad range of potential customers with products and services
targeted to their needs and to increase
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our exposure across the market. We believe that we provide our customers quick,
easy-to-use, value-added and flexible solutions across all of our distribution
channels.
Direct. We provide our products and services directly to our customers
through the following websites: www.register.com, www.namebargain.com,
www.namedemo.com and www.afternic.com. We also offer services to corporate
customers through our Corporate Services division.
Websites.
o Register.com. Through our www.register.com website, customers
may register a domain name in six quick, easy-to-follow steps
and access the value-added products and services we offer to
establish, maintain and enhance their Internet presence.
Through our affiliate program, we pay a commission for
customer referrals that result in domain name registrations to
encourage others to provide links to our register.com website.
In June 2000, we launched Register.com Espanol which allows
users to register and manage domain names through a Spanish
language interface, allowing Spanish speakers to receive the
same level of service as our English-speaking customers
receive.
o NameBargain.com. In August 2000, we launched NameBargain.com
to appeal to the speculator market. Through this website, we
offer registrations at a substantial discount to our standard
registration fees, targeted to bulk customers. Names
registered through this service come with limited services and
customer support.
o NameDemo.com. In August 2000, we also launched NameDemo.com
through which we offer our customers the right to use a domain
name for free, limited to one name per customer, as identified
by a unique email address. Although we stopped accepting new
registrations in February 2001, we currently have over 200,000
existing registrations through NameDemo.com and we are
encouraging these registrants to purchase their domain name
registrations through register.com.
o Afternic.com. Through Afternic.com, we offer a comprehensive
suite of products and services for the secondary market for
domain name registrations including, auctions, appraisals and
escrow services.
Corporate Services. This division is dedicated to meeting the needs of
our corporate customers with high volume registration needs. Many companies
currently rely on internal brand managers to register and manage domain names
related to their trademarks and brand names. We believe that we can provide
these services more efficiently through our dedicated team of account managers.
Indirect. We offer our products and services indirectly through our
Global Partner Network of private label and co-branded websites, which include
ISPs, web-hosting companies, telecom carriers, web portals and other web-based
businesses whose websites may appeal to our target customers. In addition to
providing our network participants with flexible software solutions to enable
them to resell our domain registration and related products and services, we
provide ISP Manager, a real-time domain management tool that allows these
companies to
11
control aspects of the domain name for their customers directly and to monitor
their customers' domain name registration activity. We currently have over 650
participants in our Global Partner Network of which approximately 125 are based
outside the United States.
We offer potential partners a choice between flexible software
solutions that are distinguishable primarily based upon the ease of
implementation and the degree of integration they provide. Examples of the
alternatives we offer include:
o BestSRS. This turn-key application is easy to install and can
be quickly customized to match the design of a partner's
website.
o TPP. For more technically sophisticated partners, TPP, our
application protocol interface (API), provides a high level of
control over integration of our registration services into the
partner's service offerings and databases.
o Co-brand. We can also provide our partners with an easily
constructed co-branded, customized website through which they
can offer our services. Typically, the co-branded website is
accessed through the participant's home page and provides one
or more links back to its website to facilitate the sale of
additional products and services.
Using either BestSRS or TPP, partners can elect to manage the domain name
support services (notification, customer service, billing and collections)
themselves or to outsource it to us. We typically manage support services for
our co-brand partners. In addition to our Global Partner Network, we have
entered into and will continue to seek marketing, sales and distribution
arrangements with third parties that we believe may further our strategy of
increasing our revenue from domain name registrations.
International. Our direct and indirect distribution channels are
accessible through Internet access worldwide. We currently offer our customers
the ability to register domain names in over 240 country code domains and have
approximately 125 network participants with principal places of business outside
the United States.
Marketing
Our marketing efforts focus on maximizing our return on investment by
improving customer retention and lowering acquisition costs. We do this by
better understanding our target audiences and providing them with the products
and services they need and want, thereby encouraging them to remain our
customers for an extended period of time. We use a combination of direct
response and targeted mass vehicles, including email, direct mail, online and
direct response television and radio tactics to reach our target customers
efficiently.
Our key strategic marketing thrusts for 2001 support overall company
objectives, which are to drive profitable registration (domestically and
overseas), develop and launch new products and services, and improve our company
renewal rate across all distribution channels.
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Advertising Sales
We believe that our growing user base provides advertisers and
merchants with an attractive platform from which to reach their target audience,
particularly for advertisers who are interested in reaching potential customers
at the time they are establishing a web presence. During the year ended December
31, 2000, our advertising revenues increased by 295% over the year ended
December 31, 1999. In addition to our Register.com, Afternic.com,
NameBargain.com and NameDemo.com websites, we sell advertising space on
FirstStepSite and FutureSite pages.
Technology
Our technology infrastructure is built and maintained for reliability,
scalability, flexibility and security and is administered by our skilled
technical staff.
Facilities. Our online systems are located at hosting facilities in New
Jersey and New York. We are currently building out our systems located at one of
these facilities to increase redundancy and capacity. We believe each facility
has ample power redundancy, fire suppression, peering to other ISPs, bandwidth
and backbone redundancy to support the current and anticipated growth of our
business.
Reliability. Our technology platform is designed to maximize
reliability. Hardware components are redundant to provide high availability. We
provide software and data reliability through a variety of processes and
quality-assurance procedures. Our standard procedures include daily database
backups, offsite storage of critical information and incremental backups of
ongoing database modifications. Additional reliability is provided by our
fault-tolerant and redundant platform architecture, which utilizes clustering
technology that is designed to ensure uninterrupted service.
Scalability and Flexibility. We designed our systems to handle a large
volume of domain name registrations, general website traffic and domain name
server queries in an efficient, scalable and fault-tolerant manner. Our
application servers are clustered and use a shared file system which allows us
to add additional capacity. Our system is designed to scale easily and to
support rapid growth without the need to redesign the network.
Security. Our technology incorporates a variety of security techniques
to protect domain name registration data, including limiting access to users
through a strict rule base implemented on the network's router and encrypting
user passwords at the time of account creation. We have initiated processes to
maintain internal server passwords as well as to ensure limited accessibility to
critical components on the network. Our network is protected by a suite of
industry-leading hardware/software security solutions.
Ongoing Improvements. We are in the process of adding new equipment to
one of our hosting facilities to help protect our network and further improve
scalability and reliability. We expect to add network operation centers in other
locations, which will help add redundancy and intelligent load balancing to our
systems. We believe that introducing geographic redundancy will enable us to
maintain systems that are less susceptible to regional Internet outages.
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Technology Staff. Our technology team is skilled in developing
scalable, reliable and critical applications and solutions. Many of our
technologies, including our web-based customer care tracking system, were
developed in-house. Our team of engineers monitors our systems 24 hours per day,
seven days per week.
In 1998, 1999 and 2000, we spent $277,000, $1.8 million and $5.6
million, respectively, on our research and development activities.
Historical Operations
We are the successor by merger to Forman Interactive Corp. Forman
Interactive commenced operations in 1994 as a developer of electronic commerce
software and began offering web hosting and related products and services in
1997. Forman Interactive's principal software product was Internet Creator, a
website management software program. We have not sold Internet Creator since
October 1998 and ceased distributing it to our web-hosting customers at no cost
in spring 1999. We continue to operate our web-hosting service. However, since
its development is not part of our business strategy, we are not actively
promoting this service. In February 1998, we began to distribute domain names,
in most cases without charge and in a few cases on a commission basis when we
distributed domain names for international registrars and registries. In April
1999, we commenced offering registration services for country code domains and
in June 1999, we began operating as a paid registrar in the .com, .net and .org
domains.
Administration of the Internet; Government Regulation and Legal Uncertainties
Under a 1993 cooperative agreement with the U.S. Department of
Commerce, Network Solutions (now a VeriSign company) was authorized to act as
the sole registry and sole registrar for domain names in the .com, .net and .org
top level domains. On July 1, 1997, President Clinton approved and released a
report entitled A Framework for Global Electronic Commerce, in which he
authorized the creation of an inter-agency working group under the leadership of
the Department of Commerce to study domain name system registration and
administration issues, specifically the issue of privatizing the management of
the domain name system. In October 1998, in response to this report, the
Department of Commerce amended the Network Solutions cooperative agreement to
call for the formation of a not-for-profit corporation to oversee the management
of, and create policies regarding, domain names in the .com, .net and .org top
level domains. The Department of Commerce also proposed that additional
registrars be authorized to register domain names in these domains based upon
the idea that competitive registrars would benefit consumers and businesses.
ICANN was recognized as this not-for-profit corporation by the Department of
Commerce in November 1998.
ICANN's authority is based upon voluntary compliance with its consensus
policies. While these policies do not constitute law in the United States or
elsewhere, they have a significant influence on the future of the domain name
registration system.
In April 1999, ICANN selected five testbed companies to act as
registrars to register domain names in the .com, .net and .org domains and
compete with Network Solutions. These five entities were Register.com, America
Online, Inc., France Telecom, Melbourne IT and CORE, which is a worldwide
consortium of registrars. Each registrar was required to execute a
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one-year accreditation agreement with ICANN. Register.com was the first of the
testbed companies to begin directly registering domain names. The testbed
registrars were the first registrars provided with access to the Shared
Registration System, which allowed them to interface directly with Network
Solutions' registry. The testbed period ended on November 30, 1999. As of March
16, 2001, 148 companies were accredited by ICANN to act as registrars. Of these,
only 75 are connected to the Shared Registration System, and the remaining
accredited registrars are still in the development phase with respect to
offering registration services. An additional 18 companies have qualified for
accreditation but have yet to sign the agreements required by ICANN.
In November 2000, ICANN approved bids for the following seven new gTLD
registries: .biz, .info, .name and .pro, which are referred to as unsponsored
new gTLDs, and .museum, .coop and .aero, which are referred to as sponsored new
gTLDs. These prospective gTLD registries are currently in the process of
negotiating contracts with ICANN and, while there can be no assurances that they
will successfully launch, based on actions taken by the ICANN board at its March
2001 meeting, we currently expect the four unsponsored new gTLDs (.biz, .info,
.name and .pro) to commence selling registrations through registrars in the
second half of 2001. In March 2001, ICANN's Board of Directors authorized a
seven day public comment period on the negotiated agreements in an effort to
expedite the introduction of the new gTLDs.
On November 10, 1999, ICANN, VeriSign and the Department of Commerce
executed a set of agreements that were intended to amend the 1993 cooperative
agreement and make VeriSign an ICANN-accredited registrar. These agreements
provided for VeriSign to act as the .com, .net and .org registry until November
30, 2003. In addition, they provide that if VeriSign effects a legal separation
between its registry and registrar operations by May 9, 2001, the term of the
agreement for the registry operations will be extended for an additional four
years until November 30, 2007. These agreements also provide that the annual fee
that a registrar must pay to the registry for each domain name registered in a
gTLD is $6 per year during the term of the agreement.
In a press release dated March 1, 2001, VeriSign announced that it has
reached preliminary agreements with ICANN which would supercede the original
agreements and enable VeriSign to continue to operate the .com registry until at
least 2007 and the .net registry until at least 2006 even as it retained
ownership and control over its registrar business. The preliminary agreements
also provide that under certain conditions, VeriSign may continue to operate
both registries beyond these dates. VeriSign would be permitted to continue to
operate its domain name registrar business for .com, .net and .org domains
subject to the existing structural separation between VeriSign's registry and
registrar business. VeriSign would also continue to operate the .org registry
through December 2002 at which point that registry would return to its status
for use by non-profit organizations around the world. These preliminary
agreements remain subject to approval of the ICANN board of directors and the
Department of Commerce. Therefore, we do not know if they will be adopted at
all, and if so, if they will be modified from their current draft form.
On December 1, 1999, ICANN's first substantive policy, the Uniform
Dispute Resolution Policy, became effective. This dispute resolution policy was
created to address the problem of cybersquatting, or registering the trademark
of another as a domain name with the intent to
15
wrongfully profit from the goodwill in that name created by the trademark
holder. ICANN intends to create additional policies governing the domain name
registration system, and we will be affected by any of these policies. We played
a leading role in the drafting and implementation of the Uniform Dispute
Resolution Policy, and we intend to continue to play an active role in the
development of ICANN policies.
There have been ongoing legislative developments and judicial decisions
with respect to trademark infringement claims, unfair competition claims, and
dispute resolution policies relating to the registration of domain names. To
help protect ourselves from liability in the face of these ongoing legal
developments, we have taken the following precautions:
o in our standard registration agreement, we require that each
registrant indemnify, defend and hold us harmless for any
dispute arising from the registration or use of a domain name
registered in that person's name; and
o on December 1, 1999, we implemented the Uniform Domain Name
Dispute Resolution Policy as approved by ICANN.
Despite these precautions, we cannot assure you that our indemnity and
dispute resolution policies will be sufficient to protect us against claims
asserted by various third parties, including claims of trademark infringement
and unfair competition in our capacity as registrar.
New laws or regulations regarding domain names and domain name
registrars may be adopted at any time. Our responses to uncertainty in the
industry or new regulations could increase our costs or prevent us from
delivering our services over the Internet, which could delay growth in demand
for our services and limit the growth of our revenues. New and existing laws may
cover issues such as:
o pricing controls at the registry level;
o the creation of additional generic top level domains and
country code domains;
o consumer protection;
o cross-border domain name registration;
o trademark, copyright and patent infringement;
o domain name dispute resolution; and
o other claims based on the nature of content of domain names
and domain name registration.
In November 1999, the Anticybersquatting Consumer Protection Act was
enacted by the United States government. This law seeks to curtail a practice
commonly known in the domain name registration industry as "cybersquatting." A
cybersquatter is generally defined in the Act as one who registers a domain name
that is identical or similar to another party's trademark, or the name of
another living person, in each case with the bad faith intent to profit from use
of the
16
domain name. The law states that registrars may not be held liable for
registration or maintenance of a domain name for another person absent a showing
of the registrar's bad faith intent to profit from the use of the domain name.
Registrars may be held liable, however, if they do not comply promptly with
procedural provisions of the law. For example, if there is a litigation
involving a domain name, the registrar is required to deposit a certificate
representing the domain name registration with the court. To date, there is no
precedent to specify under what circumstances we may suffer liability as a
registrar under this law. If we are held liable under this law, any liability
could have a material adverse effect on our business, financial condition and
results of operations.
Competition
We believe that our industry experience, product and service offerings,
customer service focus and broad and efficient distribution channels enable us
to compete favorably in providing domain name registration services and
ancillary products and services and in attracting advertisers. However, our
competitors may have greater name recognition (particularly in international
markets), longer operational histories and greater financial, technical and
managerial resources and may undertake extensive marketing campaigns for their
brands and services, adopt aggressive pricing policies and make more attractive
offers to potential distribution partners, advertisers and customers.
Competition in the Domain Name Registration Industry. As of March 16,
2001, VeriSign and 73 other registrars, not including us, were registering
domain names in the .com, .net and .org domains. An additional 73 registrars
have been accredited by ICANN but are not yet registering domain names, and 18
registrars have qualified to register domain names in these domains but have not
yet signed the agreements required for registering domain names in these
domains. Our principal competitor in the market for domain name registration
services is the VeriSign registrar. The VeriSign registrar has significant
competitive advantages over all competitive registrars stemming from its legacy
as the sole registrar for domain names in the .com, .net and .org domains prior
to June 1999 and from VeriSign's continuing exclusive control over the .com,
.net and .org registry. The barriers for other competitors seeking to enter the
market as domain name registrars include developing the requisite technological
infrastructure and meeting ICANN's accreditation requirements. Many entrants
into the domain name registration industry since we began operating as a paid
registrar in June 1999 are offering domain name registration at prices lower
than our own with minimal or no value-added products and services. These include
competitors who offer domain name registration through bulk registrations, such
as BulkRegister.com, a subsidiary of Alabanza, Inc., and registrars that target
indirect and wholesale channels such as, Tucows, Inc. and Melbourne IT. In
addition to other registrars, we face competition from companies who align
themselves with accredited registrars to offer domain name registration
services, including ISPs, web-hosting companies, telecommunications firms and
Internet professional service firms. Our competitors in the domain name
registration industry include companies with strong brand recognition
(particularly in international markets) and Internet industry experience, such
as major telecommunications firms, cable companies, ISPs, web-hosting providers,
Internet portals, systems integrators, consulting firms and other registrars.
The growth of the competitive registrars who have entered the industry and the
continued introduction of competitive registrars into the domain name
registration industry have made it difficult for us to maintain market share and
contributed to a
17
sequential quarterly decline in the number of paid registrations we performed
since the first quarter of 2000.
Competition with Respect to Our Online Products and Services. An
important component of our business strategy is to offer value-added products
and services that encourage customers to use our website for the development and
maintenance of their online presence. The markets for our products and services
are highly competitive. Other registrars have developed or entered into
strategic relationships to offer products and services similar to those that we
now provide, including our email, domain forwarding, website hosting, domain
name auctioning features, or products and services that we anticipate offering
in the future. For example, Afternic.com's principal competitor in the market
for products and services in the domain name secondary market is
GreatDomains.com, a subsidiary of VeriSign. In addition to facilitating
cross-marketing between the two companies, the acquisition by VeriSign of
Network Solutions in June of 2000 has strengthened their competitive advantage
by enabling the merged entity to couple its registration services with an
expanded range of products and services that includes those offered by VeriSign.
In addition to competing with other registrars, we also compete with many other
providers of these products and services, including application service
providers, Internet professional services firms, and domain name resellers.
Competition for Advertisers. We compete for Internet advertising and
sponsorship revenues with other domain name registrars, content-based websites,
ISPs, Internet content providers, large web-based publishers, Internet search
engines and portal companies and various other companies that facilitate
Internet advertising. We also compete with traditional offline media for a share
of advertisers' total advertising budgets.
Intellectual Property and Proprietary Rights
We believe that we are well positioned in the market for domain name
registration and related products and services in part due to our highly
recognized brand, register.com. We regard our trademarks, copyrights, trade
secrets and other intellectual property as critical to our success. We rely on
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with our employees, customers, partners and others to protect
our intellectual property rights. Despite our precautions, third parties could
obtain and use our intellectual property without authorization. Furthermore, the
validity, enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries do not protect intellectual property to the same extent as do
the laws of the United States. We have several trademark registration
applications pending, including for "The First Step on the Web" and
"FirstStepSite." All other trademarks and service marks used in this annual
report are the property of their respective owners.
We have received initial rejections from the U.S. Patent and Trademark
Office on our trademark applications for "register" and "register.com" based on
descriptiveness. We have responded to these initial rejections arguing that
these brands have become widely known through extensive use in commerce and are
valid trademarks. While we will be taking all reasonable measures to secure
trademark registrations for the "register" and "register.com" marks, we cannot
assure you that we will be able to obtain these registrations.
18
Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are or
will be made available. We also expect to license proprietary rights such as
trademarks or copyrighted material to strategic partners in the course of
planned national and international expansion. While we will attempt to ensure in
our agreements that licensees will maintain the quality of our service, we
cannot assure you that they will not take actions that might diminish the value
of our proprietary rights or reputation, which could thereby materially harm our
business.
Employees
As of December 31, 2000, we had approximately 240 full-time employees.
None of our employees are represented by a labor union or are subject to
collective-bargaining agreements. We believe that we maintain good relationships
with our employees.
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RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the risks described below, together with the other
information contained in this report. If any of the following events actually
occurs, our business, financial condition and results of operations may suffer
materially. As a result, the market price of our common stock could decline, and
you could lose all or part of your investment in our common stock.
Risks Related to Our Industry and Our Business
We have a limited operating history as a domain name registrar and expect to
encounter difficulties faced by early-stage companies.
We only recently entered the domain name registration industry. In
February 1998, we began providing a consumer interface for registering domain
names in the .com, .net, and .org domains and in country code domains by
forwarding the information we gathered from the consumer to Network Solutions or
the applicable country code registrars or registries. In June 1999, we began to
compete directly with Network Solutions for registrations in the .com, .net and
.org domains. Accordingly, we have only a limited operating history as a domain
name registrar upon which our current business and prospects can be evaluated,
and our operating results, since June 1999, are not comparable to our results
for prior periods. As a company operating in a newly competitive and rapidly
evolving industry, we face risks and uncertainties relating to our ability to
implement our business plan successfully. We cannot assure you that we will
adequately address these risks and uncertainties or that our business plan will
be successful.
We have a history of losses and although we were profitable and cash flow
positive for the quarter and year ended December 31, 2000, we cannot assure you
that we will sustain profitability or positive cash flow.
Although we achieved profitability for the quarter and year ended
December 31, 2000, this profitability was due, in part, to a one-time gain of
$4.6 million from the sale of our investment in a private company and the
recognition of interest income. We incurred losses from operations of
approximately $1.2 million for the year ended December 31, 1998, $9.7 million
for the year ended December 31, 1999, and $9.7 million for the year ended
December 31, 2000. As of December 31, 2000 our accumulated deficit totaled $11.9
million. We anticipate that our operating expenses will increase substantially
in the foreseeable future as we develop new products and services, expand
internationally, increase our sales and marketing operations, develop new
distribution channels and strategic relationships, improve our operational and
financial systems and broaden our customer service capabilities. Accordingly,
although we were profitable and had positive cash flow from operations for the
quarter and year ended December 31, 2000, we cannot assure you that we will be
able to sustain or increase our profitability or positive cash flow in the
future.
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Our earnings will be reduced in future periods because of stock-based
compensation expenses and the amortization of goodwill and other intangibles in
connection with our acquisitions.
Non-cash compensation expenses are related to grants of common stock,
stock options and warrants made to employees, directors, consultants and
vendors. For the year ended December 31, 2000, we recorded a $2.2 million
non-cash compensation charge. Based principally on grants of stock options and
warrants made to date, we will record approximately $4.2 million of additional
non-cash compensation through 2004 as follows: $1.7 million in each of 2001 and
2002, $714,000 in 2003 and $59,000 in 2004. In addition, for the year ended
December 31, 2000, we recognized a charge of $5.6 million for the amortization
of goodwill and other intangibles in connection with our acquisitions of Inabox
and Afternic.com. Under current accounting rules, we will record approximately
$53.8 million of additional amortization of goodwill and other intangibles in
connection with the aforementioned acquisitions, through 2004 as follows: $15.5
million in each of 2001 and 2002, $14.3 million in 2003 and $8.5 million in
2004. The non-cash compensation charges and amortization charges will reduce our
earnings or increase our losses, as applicable, in future periods.
We cannot predict with any certainty the effect that new governmental and
regulatory policies, or industry reactions to those policies, will have on our
business.
Before April 1999, Network Solutions managed the domain name
registration system for the .com, .net and .org domains pursuant to a
cooperative agreement with the U.S. government. In November 1998, the Department
of Commerce recognized ICANN, to oversee key aspects of the Internet domain name
registration system. Since that time and particularly because the domain name
industry is in its early stages of development, ICANN is subject to strict
scrutiny by the public and the government. For example, Congress has recently
held hearings to evaluate ICANN's selection process for new top level domains.
We cannot predict whether the proposed amendments to the agreements between
VeriSign, ICANN and the Department of Commerce announced on March 1, 2001 will
be approved by the ICANN board of directors and the Department of Commerce. We
cannot assure you that these proposed amendments or any future measures adopted
by the Department of Commerce or ICANN will benefit us or that they will not
materially harm our business, financial condition and results of operations. In
addition, we continue to face the risks that:
o the U.S. government may, for any reason, reassess its decision
to introduce competition into, or ICANN's role in overseeing,
the domain name registration market;
o the Internet community or the Department of Commerce or U.S.
Congress may become dissatisfied with ICANN and refuse to
recognize its authority or support its policies, which could
create instability in the domain name registration system;
o ICANN may attempt to impose additional fees on registrars if
it fails to obtain funding sufficient to run its operations;
o accreditation criteria could change in a way that is
disadvantageous to us; and
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o we may not be selected to register additional top-level
domains (particularly sponsored new gTLDs) as they become
approved.
We may not be able to maintain or improve our competitive position because of
strong competition from VeriSign, Inc.
Network Solutions' authorization by the U.S. government to act as the sole
domain name registrar prior to April 1999 in the .com, .net and .org domains
gives VeriSign a significant competitive advantage in the domain name
registration industry.
Before the introduction of competition into the domain name
registration industry in 1999, Network Solutions was the sole entity authorized
by the U.S. government to serve as the registrar for domain names in the .com,
.net and .org domains. This position allowed Network Solutions to develop a
substantial customer base, which gives it advantages in securing customer
renewals and in developing and marketing ancillary products and services. On
June 9, 2000, Network Solutions was acquired by VeriSign, Inc. a provider of
Internet trust services. We face significant competition from VeriSign as we
seek to increase our revenue from domain name registration services, and we
cannot assure you that we will be able to maintain or improve our competitive
position. The acquisition of Network Solutions by VeriSign has not only
facilitated cross-marketing between the two companies, but it has also
strengthened VeriSign's competitive advantage by enabling it to couple
registration services with an expanded range of products and services. Based on
VeriSign's press release dated January 24, 2001, the VeriSign registrar
registered approximately 1.9 million new and transferred registrations in the
.com, .net and .org domains for the three months ended December 31, 2000. This
compares to the approximately 655,000 new and transferred domain names that we
registered for the three months ended December 31, 2000. As of December 31,
2000, the VeriSign registrar supported approximately 15.1 million of
approximately 28.2 million active domain names, compared to approximately 3.7
million domain names that we supported as of December 31, 2000.
VeriSign's exclusive control over the registry for the .com, .net and .org
domains has given it an advantage over all competitive registrars.
The Internet domain name registration system is composed of two
principal functions: registry and registrar. Registries maintain the database
that contain names registered within the top level domains and their
corresponding Internet protocol addresses. Registrars act as intermediaries
between the registry and individuals and businesses, referred to as registrants,
seeking to register domain names. Registrars other than the VeriSign registrar
are known in the industry as "competitive registrars."
The agreements among VeriSign, ICANN and the U.S. Department of
Commerce have given VeriSign the exclusive right to operate and maintain the
registry for the .com, .net and .org domains at least until November 30, 2003.
In addition, they provide that if VeriSign separates its registry and registrar
operations by May 9, 2001, the term of the registry exclusivity extends for an
additional four years to November 30, 2007. In a press release dated March 1,
2001, VeriSign announced that it had reached preliminary agreement with ICANN
which would supercede the original agreements and enable VeriSign to continue to
operate the .com registry until at least 2007 and the .net registry until at
least 2006 even as it retained ownership and control over its
22
registrar business. The preliminary agreements also provide that, under certain
conditions, VeriSign may continue to operate both registries beyond these dates.
VeriSign would be permitted to continue to operate its domain name registrar
business for .com, .net and .org domains subject to the existing structural
separation between VeriSign's registry and registrar business. VeriSign would
also continue to operate the .org registry through December 2002 at which point
that registry would return to its status for use by non-profit organizations
around the world.
As the exclusive registry for these domains, VeriSign receives from us,
and every other competitive registrar, $6 per domain name per year. Although
registry fees may not be used directly to fund VeriSign's registrar business,
the substantial net revenues from these fees, and the certainty of receiving
them, provide VeriSign significant advantages over any competitive registrar. If
the preliminary agreements are accepted without modification by the board of
directors of ICANN and the Department of Commerce, we believe they will
strengthen VeriSign's competitive advantage over us and other competitive
registrars by securing VeriSign's ability to act as a registrar even while it is
the sole registry for the .com, .net and .org domains and earns revenues from
the fees we pay.
We also face competition from other competitive registrars and others in the
domain name registration industry and expect this competition to continue to
intensify.
Competition in the domain name registration services industry will continue to
intensify as the number of entrants into the market increases.
When we began providing online domain name registrations in the .com,
.net and .org domains in June 1999, we were one of only five testbed competitive
registrars accredited by ICANN to interface with the Shared Registration System.
The Shared Registration System was designed to allow registrars to interface
directly with Network Solutions' registry for domain names. The testbed period
ended on November 30, 1999. As of March 16, 2001, ICANN had accredited 148
competitive registrars, including us, to register domain names in the .com, .net
and .org domains. As of March 16, 2001, VeriSign and 73 other registrars, not
including us, were registering domain names in these domains. An additional 73
registrars have been accredited to register but are not yet registering domain
names, and 18 registrars have qualified to register domain names but have not
yet signed the agreements required by ICANN and VeriSign. We face substantial
competition from competitive registrars and others in that:
o many accredited registrars that are not currently registering
domain names may begin to do so in the near future;
o many companies that are not accredited registrars offer domain
name registrations through a competing accredited registrar's
system; and
o ICANN will continue to accredit new registrars to register new
and existing generic top level domains.
The continued introduction of competitive registrars into the domain
name registration industry as well as the growth of the competitive registrars
who have entered the industry have made it difficult for us to maintain our
current market share and contributed to a sequential
23
quarterly decline in the number of paid registrations we performed since the
first quarter of 2000. If we continue to experience a decline in paid
registrations, our business, financial condition and results of operations would
be materially adversely affected. Also, as a result of increased competition,
our period-over-period growth rates are likely to fluctuate over time.
We face competition from other competitive registrars and others in the domain
name registration industry that may have longer operating histories, greater
name recognition (particularly in international markets) or greater resources.
Our competitors in the domain name registration industry include
companies with strong brand recognition and Internet industry experience, such
as major telecommunications firms, cable companies, ISPs, web-hosting providers,
Internet portals, systems integrators, consulting firms and other registrars.
Many of these companies also possess core capabilities to deliver ancillary
services, such as customer service, billing services and network management. Our
market position could be harmed by any of these existing or future competitors,
some of which may have longer operating histories, greater name recognition
(particularly in international markets) and greater financial, technical,
marketing, distribution and other resources than we do.
Increasing competition in the domain name registration industry could force us
to reduce our prices for our core products and services, which would negatively
impact our results of operations.
In response to increasing competition in the domain name registration
industry, we may be required, by market factors or otherwise, to reduce, perhaps
significantly, the prices we charge for our core domain name registration and
related products and services. Some of our competitors offer domain name
registration services at a wholesale price level minimally above the $6 registry
fee. During the year 2000, other competitors, including VeriSign, reduced their
pricing for domain name registrations both for short-term promotions and on a
permanent basis. Further, some of our competitors have offered domain name
registrations for free, deriving their revenues from other sources. Reducing the
prices we charge for domain name registration services through our core
register.com branded offerings in order to remain competitive would materially
adversely affect our results of operations.
In response to competitive challenges, during 2000 we experimented with
different promotions and price points for our core products and services. During
the three months ended September 30, 2000, in addition to running significantly
discounted and free promotional campaigns to acquire additional registrations
and customers, we added our NameBargain.com and NameDemo.com product and service
offerings to expand into different segments of the domain name registration
market we did not previously serve. Through NameBargain.com we offer bulk
registrations targeted to speculators, at a substantial discount to our standard
registration fees. Through NameDemo.com we offer customers the right to use a
domain name for free, limited to one name per customer as identified by a unique
email address. Each of these new offerings also includes a reduced level of
value-added services. In February 2001, we stopped accepting new registrations
via NameDemo.com in order to evaluate its effectiveness as a customer
acquisition and conversion tool. If subscribers to NameBargain.com and
NameDemo.com do not renew their subscriptions with us or do not convert to our
higher margin products and services, we will not realize the full benefits of
having launched these services.
24
Our business will be materially harmed if in the future the administration and
operation of the Internet no longer relies upon the existing domain name system.
The domain name registration industry continues to develop and adapt to
changing technology. This development may include changes in the administration
or operation of the Internet, including the creation and institution of
alternate systems for directing Internet traffic without the use of the existing
domain name system. Some of our competitors have begun registering domain names
with extensions that rely on such alternate systems. These competitors are not
subject to ICANN accreditation requirements and restrictions. Naming systems
which use keywords rather than traditional domain names have been introduced by
other competitors. The widespread acceptance of any alternative systems could
eliminate the need to register a domain name to establish an online presence and
could materially adversely affect our business, financial condition and results
of operations.
If the growth rate of the market for domain names continues to fall, our net
revenues from domain name registrations may fall below anticipated levels.
The domain name market is still in its early stages of development and
we do not expect that it will continue to experience the same high level of
growth it has experienced in the past. The number of .com, .net and .org domain
names registered declined from 5.1 million in the third quarter of 2000 to 4.3
million in the fourth quarter, as the market began to absorb the slow-down in
the growth and expansion of the Internet. As a result, our period-over-period
growth rates in paid registrations may continue to decline as they have since
the first quarter of 2000. Such a continuing decline would materially adversely
affect our business, results of operations and financial condition.
If our customers do not renew their domain name registrations through us, and we
fail to replace their business or develop alternative sources of revenue, our
business, financial condition and results of operations would be materially
adversely affected.
The growth of our business depends in part on our customers' renewal of
their domain name registrations through us. Our first expirations for .com, .net
and .org domain names occurred in January 2001, as such, we have limited
experience to date with registration renewals for generic top level and country
code domain names. In addition, we cannot predict the volume of registration
renewals we should expect or assure you that those customers who will renew
their registrations will do so through us. We anticipate that our renewal rates
will be affected by the high number of speculative registrations which occurred
during the initial growth stage of the domain name registration industry in 1999
and 2000. If our customers decide, for any reason, not to renew their
registrations through us, our revenues from domain name registrations will
decrease and our business, financial condition and results of operations would
be materially adversely affected.
25
If new generic top level domains are not introduced this year or if our
customers turn to other registrars for their registration needs in these
newly-approved generic top level domains when they are introduced, our business,
financial condition and results of operations would be materially adversely
affected.
Based on an announcement made by ICANN in the fourth quarter of 2000,
the introduction of new generic top level domains was initially anticipated by
the first or second quarter of 2001. Contract negotiations have taken longer
than expected, and it now appears that the new generic top level domains will
not be introduced until the second half of this year. We cannot assure you that
any additional names will be finally approved and introduced in our expected
time frame, or at all. Furthermore, we cannot assure you that we will
successfully market our capabilities in these areas or that customers will rely
on us to provide registration services within these domains. Our business,
financial condition and results of operations could be materially adversely
affected if the new top level domains are not introduced this year or when they
are introduced, if substantial numbers of our customers turn to other registrars
for these registration needs.
We cannot assure you that the Afilias and RegistryPro ventures will be
successful. In addition, we may incur additional capital expenditures to
establish and develop their products and services. Such expenditures would
reduce the financial resources we could use for our primary business.
In September 2000, Afilias, LLC, a consortium of 18 ICANN-accredited
registrars including us, submitted a bid to ICANN to operate an unrestricted
generic top level domain name registry for the .info, .site and .web domain
names. In October 2000, RegistryPro, a joint venture between Virtual Internet
plc, a European provider of Internet hosting, naming and online brand management
services, and us, submitted a bid to ICANN to form a new registry for the top
level domain .pro which will be exclusively for accredited professionals. In
November 2000 both bids were selected by ICANN and .info and .pro became two of
the seven new generic top level domains anticipated to be launched pending final
contract negotiations with ICANN. In their early stages, these ventures may
require additional infusions of capital as they establish themselves as
registries of new top level domains. In the event that they do require further
funding it may be difficult to obtain financing from outside sources we may
invest our own capital to build systems to support each of Afilias and
RegistryPro and to market their services. A lack of adequate funding could
impact the registries' ability to launch their services or to promote the new
top level domains in the marketplace once launched. We cannot accurately predict
whether there will be a demand for the domain names for which these ventures
would serve as the registry, when or the extent to which we will be able to
generate revenues from Afilias and RegistryPro, or if either of these ventures
will be profitable. If there is no demand, or demand that is lower than
anticipated, for these new generic top level domains, or if the returns on our
capital expenditures are lower than expected or take longer to materialize, our
primary business, financial conditions and results of operation could be
materially adversely affected.
26
If we do not increase our registrations of multilingual domains we will not
benefit from the additional revenues generated from the fees associated with
registrations in these domains or potential upsell opportunities.
In November 2000, VeriSign introduced multilingual domain names. Our
market share penetration for multilingual domain name registrations in the
fourth quarter of 2000 was very low for several reasons including our limited
international presence. In addition, since multilingual domain names are not
fully functional yet, we anticipate continued challenges in marketing them to
customers who are interested in putting the names to use. We cannot assure you
that multilingual domain names will reach full functionality and if they do not,
we expect demand will decrease and names which have been registered will not be
renewed. If additional multilingual domain names are introduced and our
performance as a registrar of these domains does not improve, our reputation may
suffer and not only could we lose the benefit of additional revenues generated
by registrations in these domains, but we could also lose the opportunity to
participate in related business opportunities.
If our customers do not find our expanded product and service offerings
appealing, or if we fail to establish ourselves as a reliable source for these
products and services, we may remain dependent on domain name registrations as a
primary source of revenue and our net revenues may fall below anticipated
levels.
Part of our long-term strategy includes diversifying our revenue base
by offering value-added products and services, including website applications
that enable electronic commerce and other business services, to our customers.
We expect to incur significant costs in acquiring, developing and marketing
these new products and services. We cannot assure you that we will be able to
develop new products and services outside of our primary business and if we are
able to develop such products and services, that we will succeed in attaining
the market's confidence in us as a reliable provider of these products and
services. Our primary business, domain name registration services, generated
approximately 82% of our net revenues during the year ended December 31, 2000.
If we fail to offer products and services that meet our customers' needs, or we
do not provide products and services which are competitive with those offered in
the marketplace, or our customers elect not to purchase our products and
services, our anticipated net revenues may fall below expectations, we may not
generate sufficient revenue to offset these related costs and we will remain
dependent on domain name registrations as a primary source of revenue. Although
our decision to acquire Afternic.com was based on our belief that its products
and services would complement our own, we cannot assure you that we will succeed
in developing and integrating these new products and services or that they will
generate significant revenues. In addition, as we offer new products and
services, we will need to increase the size and expand the training of our
customer service staff to ensure that they can adequately respond to customer
inquiries. If we fail to provide our customer service staff with training and
staffing sufficient to support our new products and services, we may lose
customers who feel that their inquiries have not been adequately addressed.
27
If we are unable to make suitable acquisitions and investments, our long-term
growth strategy could be impeded.
Our long-term growth strategy includes identifying and acquiring or
investing in suitable candidates on acceptable terms. In particular, we intend
over time to acquire or make investments in providers of product offerings that
complement our business and other companies in the domain name registration
industry. In pursuing acquisition and investment opportunities, we may be in
competition with other companies having similar growth and investment
strategies. Competition for these acquisitions or investment targets could also
result in increased acquisition or investment prices and a diminished pool of
businesses, technologies, services or products available for acquisition or
investment. Our long-term growth strategy could be impeded if we fail to
identify and acquire or invest in promising candidates on terms acceptable to
us.
Our acquisition strategy could subject us to significant risks, any of which
could harm our business.
Acquisitions, including our recent acquisitions of Inabox and
Afternic.com, involve a number of risks and present financial, managerial and
operational challenges, including:
o diversion of management attention from running our existing
business;
o increased expenses, including legal, administrative and
compensation expenses resulting from newly hired employees;
o increased costs to integrate the technology, personnel,
customer base and business practices of the acquired company
with our own;
o adverse effects on our reported operating results due to
possible amortization of goodwill associated with
acquisitions;
o potential disputes with the sellers of acquired businesses,
technologies, services or products; and
o possible changes to our business model in ways that might
impact upon our accreditation status with ICANN.
We may not be successful in integrating the business, technology,
operations and personnel of any acquired company. Performance problems with an
acquired business, technology, service or product could also have a material
adverse impact on our reputation as a whole. In addition, any acquired business,
technology, service or product could significantly under-perform relative to our
expectations and we may not achieve the benefits we expect from our
acquisitions. For all these reasons, our pursuit of an overall acquisition and
investment strategy or any individual acquisition or investment could have a
material adverse effect on our business, financial condition and results of
operations.
28
Rapid growth in our business could strain our managerial, operational,
financial, accounting and information systems, customer service staff and office
resources.
The anticipated future growth necessary to expand our operations will
place a significant strain on our resources. In order to achieve our growth
strategy, we will need to expand all aspects of our business, including our
computer systems, telecommunications systems and related infrastructure,
customer service capabilities and sales and marketing efforts. The demands on
our network infrastructure, technical staff and technical resources have grown
rapidly with our expanding customer base. During the year ended December 31,
2000, our number of full-time employees grew from approximately 122 to
approximately 240. We cannot assure you that our infrastructure, technical staff
and technical resources will adequately accommodate or facilitate the
anticipated growth of our customer base. We also expect that we will need to
continually improve our financial and managerial controls, billing systems,
reporting systems and procedures, and we will also need to continue to expand,
train and manage our workforce. If we fail to manage our growth effectively, our
business, financial condition and results of operation could be materially
adversely affected.
If we are unable to attract and retain highly qualified management and technical
personnel, our business may be harmed.
Our success depends in large part on the contributions of our senior
management team and technology personnel and in particular Richard D. Forman,
our President and Chief Executive Officer. We face intense competition in hiring
and retaining personnel from a number of sectors, including technology and
Internet companies. Many of these companies have greater financial resources
than we do to attract and retain qualified personnel. As a result, we may be
unable to retain our employees or attract, integrate, train and retain other
highly qualified employees in the future. During the third quarter of 2000, we
experienced a significant turnover of senior management. Although we recently
added new members to our management team, these individuals have not worked with
one another before and may not be able to develop an effective working
relationship. Moreover, our new managers are still learning about our company
and our industry while working to expand our business into new areas. If our
senior management team cannot work together effectively and cannot master the
details of our business and our market, then our business will be harmed and we
will incur additional costs in seeking and retaining new management personnel.
The loss of services of these or any other executive officers or the loss of the
services of other key employees could harm our business. In addition, if we fail
to attract new personnel, or retain and motivate our current personnel, our
business, financial condition and results of operations could be materially
adversely affected.
We have entered the secondary market for domain names.
We cannot assure you that we will be able to generate revenues or profits from
operations in this market or that ICANN will not impose restrictions on the
ability of accredited registrars to conduct business in this sector.
The secondary market for domain names is still in its nascent stages of
development. In September 2000, we acquired Afternic.com, Inc. a business which
has only been in operation since September 1999. Through Afternic.com, we
provide a secondary market for companies
29
and individuals to buy and sell domain names, as well as appraisal and escrow
services for these names. Because the industry is so new, we cannot accurately
predict whether the secondary market will continue to grow, when or the extent
to which we will be able to generate revenues from this sector, or if we will be
profitable in this sector.
If the benefits of our acquisition of Afternic.com do not exceed the
costs associated with this acquisition, including any dilution to our
stockholders resulting from the issuance of shares in connection with the
acquisition, our financial results, including earnings per share, could be
adversely affected. We expect to incur an on-going monthly non-cash amortization
of approximately $996,000 for the 48 months from October 2000 through September
2004.
We cannot be certain that ICANN will not impose certain terms and
conditions on us relating to the integration of Afternic.com's secondary market
operations with our current operations. If we cannot fully integrate
Afternic.com's operations with our own, we may not be able to achieve the
anticipated benefits of the merger and our business, financial condition and
results of operations may be materially adversely affected.
We intend to expand our business internationally. This expansion could expose us
to business risks that could limit the effectiveness of our growth strategy and
cause our results of operation to suffer.
We intend to expand our business into international markets.
Introducing and marketing our products and services internationally and
developing direct and indirect international sales and support channels will
require significant management attention and financial resources. There are a
number of risks associated with conducting our business internationally that
could negatively impact our results of operation, including:
o political and economic instability in some international
markets;
o competition with foreign companies;
o legal uncertainty regarding liability and compliance with
foreign laws;
o currency fluctuations and exchange rates;
o potentially adverse tax consequences and the burdens of
complying with a wide variety of foreign laws;
o difficulties in protecting intellectual property rights in
international jurisdictions; and
o the level of adoption of the Internet in international
markets.
We may not succeed in our efforts to expand into international markets
and if we do, we cannot assure you that one or more of the factors described
above will not have a material adverse effect on our future international
operations, if any, and consequently, on our business, financial condition and
results of operation.
30
Our ability to register domain names in the .com, .net and .org domains depends
upon the continued availability and functionality of the Shared Registration
System.
The success of our business as a competitive registrar depends upon the
continued availability and functionality of the Shared Registration System,
which is maintained by VeriSign, and its ability to adapt to an expanding market
for domain name registrations. As of March 16, 2001, VeriSign and 73 other
registrars, not including us, were registering domain names through the Shared
Registration System. The 73 other accredited registrars and the 18 registrars
that have qualified for accreditation but not yet signed the requisite
agreements may begin using the system at any time. Because the Shared
Registration System has been in general use only since April 1999, we cannot
assure you that it will be able to handle the growing traffic generated by large
numbers of registrars or registrations. Our ability to provide domain name
registration services in the .com, .net and .org domains would be materially
harmed by any failure of the Shared Registration System to accommodate our
registration needs.
If we fail to comply with the regulations of the country code registries or are
unable to register domain names with those registries, our business would be
materially adversely affected.
Each of the country code registries requires registrars to comply with
specific regulations. Many of these regulations vary from country code to
country code. If we fail to comply with the regulations imposed by country code
registries, these registries will likely prohibit us from registering or
continuing to register names in their country codes. Further, in most cases, our
rights to provide country code domain name registration services are not
governed by written contract. In the case of our written contracts, there is
uncertainty as to what law may govern. As a result, we cannot be certain that we
will continue to be able to register domain names in the country code domains we
currently offer. Any restrictions on our ability to offer domain name
registrations in a significant number of country codes, or in a significant
country could materially adversely affect our business, financial condition and
results of operations.
If country code registries cease operations or otherwise fail to process
registrations or related information accurately, we would be unable to honor our
subscriptions relating to those country codes.
Country code registries may be administered by the host country,
entrepreneurs or other third parties. If these registry businesses cease
operations or otherwise fail to process domain name registrations or the related
information in country code domains, we would be unable to honor the
subscriptions of registrants who have registered, or are in the process of
registering, domain names in the applicable country code domain. If we are
unable to honor a substantial number of subscriptions for our customers for any
reason or if the country code registries fail to process our customers'
registrations in a timely and accurate fashion, our business, financial
condition and results of operations would be materially adversely affected.
We cannot assure you that our standard agreements will be enforceable.
We rely on several agreements that govern the terms of the services we
provide to our users, including domain name registration and secondary market
services. These agreements
31
contain a number of provisions intended to limit our potential liability arising
from our providing services for our customers including liability resulting from
our failure to register or maintain domain names. As most of our customers use
our services online, execution of our agreements by customers occurs
electronically or, in the case of our terms of use, is deemed to occur because
of a user's continued use of the website following notice of those terms. We
believe that our reliance on these agreements is consistent with the practices
in our industry, but if a court were to find that either one of these methods of
execution is invalid or that key provisions of our services agreements are
unenforceable, we could be subject to liability that would have a materially
adverse effect on our business, financial condition or results of operations.
Our failure to register or maintain or renew the domain names that we process on
behalf of our customers, may subject us to negative publicity, which could have
a material adverse effect on our business.
Clerical errors or systems failures, including failures of the Shared
Registration System, have resulted in our failure to properly register or to
maintain or renew the registration of domain names that we process on behalf of
our customers. Our failure to properly register or to maintain or renew the
registration of our customers' domain names may subject us to negative
publicity, which could have a material adverse effect on our business.
We may be held liable if third parties misappropriate our users' personal
information.
A fundamental requirement for online communications is the secure
transmission of confidential information over public networks. If third parties
succeed in penetrating our network security or otherwise misappropriate our
customers' personal or credit card information, we could be subject to
liability. Our liability could include claims for unauthorized purchases with
credit card information, impersonation or other similar fraud claims as well as
for other misuses of personal information, including for unauthorized marketing
purposes. These claims could result in litigation and adverse publicity which
could have a material adverse effect on our business, financial condition and
results of operations, as well as our reputation.
In addition, the Federal Trade Commission and state agencies have been
investigating various Internet companies regarding their use of personal
information. The federal government recently enacted legislation protecting the
privacy of consumers' nonpublic personal information. We cannot assure you that
our current information-collection procedures and disclosure policies will be
found to be in compliance with existing or future laws or regulations. Our
failure to comply with existing laws, including those of foreign countries, the
adoption of new laws or regulations regarding the use of personal information
that require us to change the way we conduct our business or an investigation of
our privacy practices could make it cost-prohibitive to operate our business and
prevent us from pursuing our business strategies.
We may incur significant expenses related to the security of personal
information online.
The need to securely transmit confidential information online has been
a significant barrier to electronic commerce and online communications. Any
well-publicized compromise of security could deter people from using online
services such as the ones we offer, or from using them to conduct transactions
that involve transmitting confidential information. Because our
32
success depends on the acceptance of online services and electronic commerce, we
may incur significant costs to protect against the threat of security breaches
or to alleviate problems caused by these breaches.
We may not be able to protect and enforce our intellectual property rights or
protect ourselves from the intellectual property claims of third parties.
We may be unable to protect and enforce our intellectual property rights from
infringement.
We rely upon copyright, trade secret and trademark law, invention
assignment agreements and confidentiality agreements to protect our proprietary
technology, including software and applications and trademarks, and other
intellectual property to the extent that protection is sought or secured at all.
We do not currently have patents on any of our technologies or processes. While
we typically enter into confidentiality agreements with our employees,
consultants and strategic partners, and generally control access to and
distribution of our proprietary information, we cannot ensure that our efforts
to protect our proprietary information will be adequate to protect against
infringement and misappropriation of our intellectual property by third parties,
particularly in foreign countries where laws or law enforcement practices may
not protect our proprietary rights as fully as in the United States.
We have received initial rejections from the U.S. Patent and Trademark
Office on our trademark applications for "register" and "register.com" based on
descriptiveness. We have responded to these initial rejections arguing that
these brands have become widely known through extensive use in commerce and are
valid trademarks. While we will be taking all reasonable measures to secure
trademark registrations for the "register" and "register.com" marks, we cannot
assure you that we will be able to obtain these registrations. Our inability to
obtain these trademark registrations could materially harm our business.
Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are or
will be made available. We also expect to license proprietary rights such as
trademarks or copyrighted material to strategic partners in the course of
planned national and international expansion. While we will attempt to ensure in
our agreements that licensees will maintain the quality of our service, we
cannot assure you that they will not take actions that might diminish the value
of our proprietary rights or reputation, which could thereby materially harm our
business.
Furthermore, because the validity, enforceability and scope of
protection of proprietary rights in Internet-related industries is uncertain and
still evolving, we cannot assure you that we will be able to defend our
proprietary rights. In addition to being difficult to police, once any
infringement is detected, disputes concerning the ownership or rights to use
intellectual property could be costly and time-consuming to litigate, may
distract management from operating the business and may result in our losing
significant rights and our ability to operate our business.
We cannot assure you that third parties will not develop technologies or
processes similar or superior to ours.
We cannot ensure that third parties will not be able to independently
develop technology, processes or other intellectual property that is similar to
or superior to ours. The unauthorized
33
reproduction or other misappropriation of our intellectual property rights,
including copying the look, feel and functionality of our website, could enable
third parties to benefit from our technology without our receiving any
compensation and could materially adversely affect our business, financial
condition and results of operations.
We may be subject to claims of alleged infringement of intellectual property
rights of third parties.
We do not conduct comprehensive patent searches to determine whether
our technology infringes patents held by others. In addition, technology
development in Internet-related industries is inherently uncertain due to the
rapidly evolving technological environment. As such, there may be numerous
patent applications pending, many of which are confidential when filed, with
regard to similar technologies. To date, we have not been notified that our
technologies infringe the proprietary rights of any third parties. However,
third parties may assert infringement claims against us with respect to past,
current or future technologies, and these claims and any resultant litigation,
should it occur, could subject us to significant liability for damages. Even if
we prevail, litigation could be time-consuming and expensive to defend, and
could result in the diversion of management's time and attention. Any claims
from third parties may also result in limitations on our ability to use the
intellectual property subject to these claims unless we are able to enter into
agreements with the third parties making these claims. Such royalty or licensing
agreements, if required, may be unavailable on terms acceptable to us, or at
all. If a successful claim of infringement is brought against us and we fail to
develop non-infringing technology or to license the infringed or similar
technology on a timely basis, it could materially adversely affect our business,
financial condition and results of operations.
We rely on certain technologies that we license from other parties. For
instance, VeriSign has licensed us the right to use key software products and
database technology. We cannot assure you that these third-party technology
licenses will not infringe on the proprietary rights of others or will continue
to be available to us on commercially reasonable terms, if at all. The loss of
such technology could require us to obtain substitute technology of lower
quality or performance standards or at greater cost, which could materially harm
our business.
The nature of our services may subject us to alleged infringement and other
claims relating specifically to domain names.
As a registrar of domain names, a provider of web-hosting services, and
a participant in the secondary market for domain names, we may be subject to
various claims, including claims from third parties asserting trademark
infringement, unfair competition and violations of publicity and privacy rights,
to the extent that such parties consider their rights to be violated by the
registration of particular domain names by other parties or our hosting of
third-party websites or secondary market activities.
The Anticybersquatting Consumer Protection Act was enacted in November
1999 to curtail a practice commonly known in the industry as "cybersquatting."
Cybersquatting is a problem that could be exacerbated with any additional top
level domain names that may be established by ICANN. A cybersquatter is
generally defined in this Act as one who registers a domain name that is
identical or similar to another party's trademark or the name of a living
34
person, in each case with the bad faith intent to profit from use of the domain
name. Although the Act states that registrars may not be held liable for
registering or maintaining a domain name for another person absent a showing of
the registrar's bad faith intent to profit from the use of the domain name,
registrars may be held liable if they fail to comply promptly with procedural
provisions. If we are held liable under this law, any liability could have a
material adverse effect on our business, financial condition and results of
operations.
In addition, although established case law and statutory law have, to
date, shielded us from liability relating to cybersquatting registrations on our
site in the primary registration market, the application of these laws and
precedent to the secondary market is still undeveloped. Therefore, we cannot
predict what our potential liabilities may be with respect to allegations that
our participation in the secondary market facilitates cybersquatting. Any
determination that our secondary market activities facilitate cybersquatting
could have a material adverse effect on our business, financial condition and
results of operations.
Risks Related to Our Technology and the Internet
Systems disruptions and failures could cause our customers and advertisers to
become dissatisfied with us and may impair our business.
Our customers, advertisers and business alliances may become dissatisfied with
our products and services due to interruptions in access to our website.
Our ability to maintain our computer and telecommunications equipment
in working order and to reasonably protect them from interruption is critical to
our success. Our website must accommodate a high volume of traffic and deliver
frequently updated information. Our website has in the past experienced slower
response times as a result of increased traffic. We have conducted planned site
outages and experienced unplanned site outages with minimal impact on our
business. Currently, our systems operate, on average, at approximately 50%
capacity. If we were to experience a substantial increase in traffic and fail to
increase our capacity, our customers would experience slower response times or
disruptions in service. Our customers, advertisers and business alliances may
become dissatisfied by any systems failure that interrupts our ability to
provide our products and services to them. Substantial or repeated system
failures would significantly reduce the attractiveness of our website and could
cause our customers, advertisers and business alliances to switch to another
domain name registration service provider.
Our customers, advertisers and business alliances may become dissatisfied with
our products and services due to interruptions in our access to the Shared
Registration System or country code registries.
We depend on the Shared Registration System and country code registries
to register domain names on behalf of our customers. We have in the past
experienced problems with the Shared Registration System, including outages,
particularly during its implementation phase. Any significant outages in the
Shared Registration System or country code registries would prevent us from
delivering or delay our delivery of our services to our customers. Prolonged or
repeated interruptions in our access to the Shared Registration System or
country code registries
35
could cause our customers, advertisers and business alliances to switch to
another domain name registration service provider.
Delays or systems failures unrelated to our systems could harm our business.
Our customers depend on ISPs, online service providers and others to
access our websites. Many of these parties have experienced outages and could in
the future experience outages, delays and other difficulties due to systems
failures unrelated to our systems. Although we carry general liability
insurance, our insurance may not cover any claims by dissatisfied customers,
advertisers or strategic alliances, or may be inadequate to indemnify us for any
liability that may be imposed in the event that a claim were brought against us.
Our business could be materially harmed by any system failure, security breach
or other damage that interrupts or delays our operations.
Our business would be materially harmed if our computer systems become damaged.
Our network and communications systems are located at hosting
facilities in New Jersey and New York. We are currently building out our systems
located at one of these facilities and may in the future add additional
facilities to make our systems geographically redundant. We cannot assure you
that when this build out is complete, if at all, our systems will be
geographically redundant. Fires, floods, earthquakes, power losses,
telecommunications failures, break-ins and similar events could damage these
systems. Computer viruses, electronic break-ins, human error or other similar
disruptive problems could also adversely affect our systems. We do not carry
business interruption insurance. Accordingly, any significant damage to our
systems would have a material adverse effect on our business, financial
condition and results of operations.
Our ability to deliver our products and services and our financial condition
depend on our ability to license third-party software, systems and related
services on reasonable terms from reliable parties.
We depend upon various third parties for software, systems and related
services, including access to the Shared Registration System provided by
VeriSign. Some of these parties have a limited operating history or may depend
on reliable delivery of services from others. If these parties fail to provide
reliable software, systems and related services on agreeable license terms, we
may be unable to deliver our products and services.
Failure by our third-party provider of credit card processing services to
process payments in a timely fashion will have a negative effect on our
business.
Under the terms of our accreditation agreement with ICANN, we are
required to obtain a reasonable assurance of payment of registration fees prior
to registering or renewing domain names. To satisfy this requirement, we have
engaged Cybersource to process credit card payments for our individual
customers. Therefore, if Cybersource or its system fails for any reason to
process credit card payments in a timely fashion, we may not be in compliance
with ICANN's requirement and as a result may not be allowed to process domain
name registrations. In addition, the domain name reservation process will be
delayed and customers may be unable to obtain their desired domain name.
36
Our failure to respond to the rapid technological changes in our industry may
harm our business.
If we are unable, for technological, legal, financial or other reasons,
to adapt in a timely manner to changing market conditions or customer
requirements, we could lose customers, strategic alliances and market share. The
Internet and electronic commerce are characterized by rapid technological
change. Sudden changes in user and customer requirements and preferences, the
frequent introduction of new products and services embodying new technologies
and the emergence of new industry standards and practices could render our
existing products, services and systems obsolete. The emerging nature of
products and services in the domain name registration industry and their rapid
evolution will require that we continually improve the performance, features and
reliability of our products and services. Our success will depend, in part, on
our ability:
o to enhance our existing products and services;
o to develop and license new products, services and technologies
that address the increasingly sophisticated and varied needs
of our current and prospective customers; and
o to respond to technological advances and emerging industry
standards and practices on a cost-effective or timely basis.
The development of additional products and services and other
proprietary technology involves significant technological and business risks and
requires substantial expenditures and lead time. We may be unable to use new
technologies effectively or adapt our websites, internally developed technology
or transaction-processing systems to customer requirements or emerging industry
standards. Updating our technology internally and licensing new technology from
third parties may require us to incur significant additional capital
expenditures.
If Internet usage does not grow, or if the Internet does not continue to expand
as a medium for commerce, our business may suffer.
Our success depends upon the continued development and acceptance of
the Internet as a widely used medium for commerce and communication. Rapid
growth in the uses of and interest in the Internet is a relatively recent
phenomenon and we cannot assure you that use of the Internet will continue to
grow at its current pace. A number of factors could prevent continued growth,
development and acceptance, including:
o the unwillingness of companies and consumers to shift their
purchasing from traditional vendors to online vendors;
o the Internet infrastructure may not be able to support the
demands placed on it, and its performance and reliability may
decline as usage grows;
o security and authentication issues may create concerns with
respect to the transmission over the Internet of confidential
information, such as credit card
37
numbers, and attempts by unauthorized computer users,
so-called hackers, to penetrate online security systems; and
o privacy concerns, including those related to the ability of
websites to gather user information without the user's
knowledge or consent, may impact consumers' willingness to
interact online.
Any of these issues could slow the growth of the Internet, which could
have a material adverse effect on our business, financial condition and results
of operations.
If widespread use of the Internet as an advertising and marketing medium fails
to develop our future business could be materially adversely affected.
Our future success depends in part on the use of the Internet as an
advertising and marketing medium. Advertising revenues constituted 14% of our
net revenues for the year ended December 31, 2000. The Internet advertising
market is new and rapidly evolving, and it cannot yet be compared with
traditional advertising media to gauge its effectiveness. As a result, demand
for and market acceptance of Internet advertising are uncertain. Further, the
price we are able to charge for advertisements has been negatively impacted by
the overall Internet advertising market, which negatively impacts our business.
Many of our current and potential customers have little or no experience with
Internet advertising and have allocated only a limited portion of their
advertising and marketing budgets to Internet activities. The adoption of
Internet advertising, particularly by entities that have historically relied
upon traditional methods of advertising and marketing, requires the acceptance
of a new way of advertising and marketing. These customers may find Internet
advertising to be less effective for meeting their business needs than
traditional methods of advertising and marketing. Furthermore, there are
software programs that limit or prevent advertising from being delivered to a
user's computer. Widespread adoption of this software by users would
significantly undermine the commercial viability of Internet advertising. These
factors could materially adversely affect our business, financial condition and
results of operations.
We depend on the technological stability and maintenance of the Internet
infrastructure.
Our success and the viability of the Internet as an information medium
and commercial marketplace will depend in large part upon the stability and
maintenance of the infrastructure for providing Internet access and carrying
Internet traffic. Failure to develop a reliable network system or timely
development and acceptance of complementary products, such as high-speed modems,
could materially harm our business. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity or due to
increased government regulation.
We may become subject to burdensome government regulations and legal
uncertainties affecting the Internet.
To date, government regulations have not materially restricted the use
of the Internet. The legal and regulatory environment pertaining to the
Internet, however, is uncertain and may change. Both new and existing laws may
be applied to the Internet by state, federal or foreign governments, covering
issues that include:
38
o sales and other taxes;
o user privacy;
o the expansion of intellectual property rights;
o pricing controls;
o characteristics and quality of products and services;
o consumer protection;
o cross-border commerce;
o libel and defamation;
o copyright, trademark and patent infringement;
o pornography; and
o other claims based on the nature and content of Internet
materials.
The adoption of any new laws or regulations or the new application or
interpretation of existing laws or regulations to the Internet could hinder the
growth in use of the Internet and other online services generally and decrease
the acceptance of the Internet and other online services as media of
communications, commerce and advertising. Our business may be harmed if any
slowing of the growth of the Internet reduces the demand for our services. In
addition, new legislation could increase our costs of doing business and prevent
us from delivering our products and services over the Internet, thereby harming
our business, financial condition and results of operations.
The introduction of tax laws targeting companies engaged in electronic commerce
could materially adversely affect our business, financial condition and results
of operations.
We file tax returns in such states as required by law based on
principles applicable to traditional businesses. However, one or more states
could seek to impose additional income tax obligations or sales tax collection
obligations on out-of-state companies, such as ours, which engage in or
facilitate electronic commerce. A number of proposals have been made at state
and local levels that could impose such taxes on the sale of products and
services through the Internet or the income derived from such sales. Such
proposals, if adopted, could substantially impair the growth of electronic
commerce and materially adversely affect our business, financial condition and
results of operations.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been enacted by the United States Congress.
However, this legislation, known as the Internet Tax Freedom Act, imposes only a
three-year moratorium, which commenced October 1, 1998 and ends on October 21,
2001, on state and local taxes on electronic commerce. It is possible that the
tax moratorium could fail to be renewed prior to October 21, 2001. Failure to
renew this
39
legislation would allow various states to impose taxes on Internet-based
commerce. The imposition of such taxes could materially adversely affect our
business, financial condition and results of operations.
Investment Risks
Our stock price, like that of many Internet companies, is highly volatile.
The market price of our common stock has been and is likely to continue
to be highly volatile and significantly affected by factors such as:
o general market and economic conditions and market conditions
affecting technology and Internet stocks generally;
o limited availability of our shares on the open market;
o actual or anticipated fluctuations in our quarterly or annual
registrations or operating results;
o announcements of technological innovations, acquisitions or
investments, developments in Internet governance or corporate
actions such as stock splits; and
o industry conditions and trends.
The stock market has experienced extreme price and volume fluctuations
that have particularly affected the market prices of the securities of
Internet-related companies. These fluctuations may adversely affect the market
price of our common stock.
Our directors, executive officers and principal stockholders own a significant
percentage of our shares, which will limit your ability to influence corporate
matters.
As of March 28, 2001, our directors, executive officers and principal
stockholders beneficially owned approximately 38% of our common stock.
Accordingly, these stockholders could have significant influence over the
outcome of any corporate transaction or other matter submitted to our
stockholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets, and also could prevent or cause a change in
control. The interests of these stockholders may differ from the interests of
our other stockholders. In addition, third parties may be discouraged from
making a tender offer or bid to acquire us because of this concentration of
ownership.
Shares eligible for public sale could adversely affect our stock price.
As of March 4, 2001, 105,007 shares of common stock held by the former
stockholders of Inabox are subject to lock-up agreements with us pursuant to
which 11,667 unregistered shares will be released from the lock-up on a monthly
basis until the expiration of the lock-up agreement on June 4, 2002. In
addition, as of March 15, 2001, 1,360,457 shares of common stock held by the
former stockholders of Afternic.com are also subject to lock-up agreements with
us pursuant to which 2,796 registered shares and 29,596 unregistered shares will
be released
40
on a monthly basis beginning April 15, 2001 until the expiration of the lock-up
agreement on March 15, 2004. Additionally, a number of holders of our common
stock and common stock issuable upon the exercise of warrants have the right to
require us to register their shares under the Securities Act. If we register
these shares, they can be sold in the public market. The market price of our
common stock could decline as a result of sales by these existing stockholders
of their shares of common stock in the market or the perception that these sales
could occur. These sales also might make it difficult for us to sell equity
securities in the future at a time and price that we deem appropriate.
Our charter documents and Delaware law may inhibit a takeover that stockholders
may consider favorable.
Provisions in our amended and restated certificate of incorporation,
our amended and restated bylaws and Delaware law could delay or prevent a change
of control or change in management that would provide stockholders with a
premium to the market price of their common stock. The authorization of
undesignated preferred stock, for example, gives our board the ability to issue
preferred stock with voting or other rights or preferences that could impede the
success of any attempt to change control of the company. If a change of control
or change in management is delayed or prevented, this premium may not be
realized or the market price of our common stock could decline.
Item 2. Properties.
We currently lease approximately 31,000 square feet of space in one
location in New York City, New York under a contract that expires in 2009. In
addition, we are negotiating a lease of 20,000 square feet of space which we
would use to relocate a portion of our customer service department. We
anticipate entering into a five year lease for this facility with an option to
renew for up to an additional ten years. We believe that this new facility and
our current space will meet our needs for at least twelve months.
Item 3. Legal Proceedings.
Although there are various claims, lawsuits and pending actions against
us incidental to the operation of our business, we are not party to any material
legal proceedings and are not aware of any pending or threatened litigation that
we would reasonably expect to affect our business materially and adversely.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth
quarter of 2000.
41
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock has been quoted on the Nasdaq National Market under
the symbol RCOM since our initial public offering on March 3, 2000. Prior to
that date, there was no public market for our common stock. The following table
sets forth, for the periods indicated, the high and low sales prices per share
of the common stock as reported on the Nasdaq National Market.
Year Ending December 31, 2000: High Low
Fourth Quarter $9.4688 $5.00
Third Quarter 38.75 6.5625
Second Quarter 69.625 18.875
First Quarter (since March 3) 116.00 24.00
On March 28, 2001, the last sale price of our common stock reported by the
Nasdaq National Market was $5.63 per share. As of March 28, 2001, we had
approximately 128 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock.
We currently anticipate retaining any future earnings for the development and
operation of our business. Accordingly, we do not anticipate declaring or paying
any cash dividends in the forseeable future.
USE OF PROCEEDS
Register.com has used all of the proceeds from its initial public
offering as follows: $98.5 million for general working capital (including the
payment of taxes), $10.0 million as payment in the Afternic.com transaction and
$6.8 million for capital expenditures.
42
Item 6. Selected Financial Data.
The following selected financial data was derived from financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, for
the respective periods. This information should be read in conjunction with
management's discussion and analysis of financial condition and results of
operations and the financial statements, including the notes thereto, included
elsewhere in this annual report. The pro forma basic and diluted earnings per
share data gives effect to the conversion of our Exchangeable Preferred Stock
and Series A Convertible Preferred Stock at the date of original issuance, while
the basic and diluted earnings per share for 2000 take into account the actual
conversion of our Exchangeable Preferred Stock and Series A Convertible
Preferred Stock on March 3, 2000, the date of our initial public offering.
Year Ended December 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ---------- ----------- ----------- -----------
Statement of Operations Data:
Net revenues............................ $ 868,018 $ 713,263 $ 1,319,359 $9,644,552 $86,109,514
Cost of revenues........................ 342,140 191,539 461,152 3,082,499 23,868,757
----------- ---------- ----------- ----------- -----------
Gross profit............................ 525,878 521,724 858,207 6,562,053 62,240,757
----------- ---------- ----------- ----------- -----------
Operating expenses:
Sales and marketing................ 935,495 366,975 863,720 7,149,693 47,311,275
Research and development........... 390,814 71,471 276,687 1,767,158 5,580,131
General and administrative
(including non-cash compensation of $0,
$0, $149,682, $4,929,200, and
$2,173,422, respectively)........... 743,609 263,017 945,107 7,309,390 13,433,737
Amortization of goodwill and
other intangibles.................... -- -- -- -- 5,582,202
----------- ---------- ----------- ----------- -----------
Total operating expenses................ 2,069,918 701,463 2,085,514 16,226,241 71,907,345
----------- ---------- ----------- ----------- -----------
Loss from operations...................... (1,544,040) (179,739) (1,227,307) (9,664,188) (9,666,588)
Other income (expenses), net.............. (170,036) (25,787) 66,559 887,270 9,519,597
Gain on sale of investment................ - - - - 4,603,457
Income tax expense........................ - - - - (4,186,658)
----------- ---------- ----------- ----------- -----------
Net (loss) income......................... $(1,714,076) $ (205,526) $(1,160,748) $(8,776,918) $ 269,808
=========== ========== =========== =========== ===========
Basic (loss) earnings per share........... $ (0.26) $ (0.02) $ (0.07) $ (0.46) $ 0.01
=========== ========== =========== =========== ===========
Weighted average shares used in
basic (loss) earnings per share........ 6,633,905 8,884,709 15,697,013 19,117,027 31,393,613
=========== ========== =========== =========== ===========
Diluted (loss) earnings per share......... $ (0.26) $ (0.02) $ (0.07) $ (0.46) $ 0.01
=========== ========== =========== =========== ===========
Weighted average shares used in
diluted (loss) earnings per share...... 6,633,905 8,884,709 15,697,013 19,117,027 39,183,902
=========== ========== =========== =========== ===========
Pro forma basic earnings per share........ $ 0.01
===========
Weighted average shares used in pro forma
basic earnings per share................ 32,191,006
===========
Pro forma diluted earnings per share...... $ 0.01
===========
Weighted average shares used in pro forma
diluted earnings per share.............. 39,981,296
===========
December 31,
--------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ---------- ----------- ----------- -----------
Balance Sheet Data:
Cash and cash equivalents $ 21,074 $ 60,845 $1,284,684 $40,944,122 $60,155,747
Short-term investments - - - 4,723,050 65,283,178
Working capital (deficiency) (949,383) (1,131,173) 569,616 29,813,357 92,159,845
Available-for-sale securities - - - - 47,980,150
Total assets 141,774 180,786 1,611,025 68,336,046 292,616,635
Total deferred revenues - 32,038 113,527 32,101,232 88,516,215
Total liabilities 1,002,920 1,243,457 788,245 46,423,191 103,722,134
Stockholders' equity (deficit) (861,146) (1,062,671) 822,780 21,912,855 188,894,501
43
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
We are a provider of Internet domain name registration products and
services worldwide for businesses and individuals that wish to have a unique
address and branded identity on the Internet. Domain names serve as part of the
infrastructure for Internet communications, including websites, email, audio,
video and telephony.
As the first registrar to compete in the domain registration market
after the U.S. government deregulated the industry, we have processed over 3.7
million domain registrations since June 1999. Currently, we directly register
domain names across the generic top level domains (gTLDs) .com, .net and .org
and we also register names in over 240 country code domains (ccTLDs), such as
.co.uk for the United Kingdom, .de for Germany and .jp for Japan.
We believe that we offer a quick and user-friendly registration process
as well as responsive and reliable customer support. We also offer a suite of
value-added products and services targeted to assist our customers in developing
and maintaining their online identities, including:
Products and Services Products and Services
Provided by Us Provided by Others
o real-time domain name management o email
o website-creation tools under the name o web hosting
FirstStepSite
o domain name forwarding o digital certificates under the name Commerce
Lock
o domain name re-sale services, such as auctions, o trademark monitoring under the name Trademark
appraisals and escrow services, offered through Guardian
our subsidiary Afternic.com
Our mission is to become the preferred partner for customers who seek
to create, enhance and manage their commercial Internet presence.
Our retail customer base is comprised of small to medium size
businesses as well as SOHOs (Small Office/Home Office) and individuals. These
customers purchase domain name registration services directly from our website
at www.register.com. We sell domain name registration products and services to
enterprises with high volume registration needs through our Corporate Services
Division. In addition, to extend our distribution we maintain a Global Partner
Network of over 650 ISPs, web-hosting companies, telecom carriers, web portals
and
44
other web-based businesses. Using our flexible software solutions, these
companies resell our domain registration and related products and services to
their customers.
We are the successor by merger to Forman Interactive Corp. Forman
Interactive commenced operations in 1994 as a developer of electronic commerce
software, and began offering web-hosting and related products and services in
1997. In February 1998, we began to distribute domain names either for free or,
to a lesser extent, were paid commissions for the domain names we distributed
for international registrars and registries. In April 1999, we commenced
offering registration services for country code domains and in June 1999, we
began operating as a paid registrar in the .com, .net and .org domains.
In June 2000, we acquired all of the outstanding capital stock of
Inabox, Inc. through a merger for approximately $1.0 million in cash and 280,019
shares of our common stock. We use Inabox's software to develop our
FirstStepSite product and BestSRS, one of the reseller solutions offered to our
Global Partner Network. The acquisition was accounted for using the purchase
method of accounting. As a result, Inabox's financial results are consolidated
with our financial results from the date of acquisition.
In September 2000, we acquired Afternic.com, Inc., a leading secondary
market exchange for domain names, for approximately $10.0 million cash and the
issuance of 4,378,289 shares of our common stock to the stockholders of
Afternic.com, a portion of which cash and stock was used to satisfy existing
obligations of Afternic.com. This transaction was accounted for using the
purchase method of accounting. As a result, Afternic.com's financial results are
consolidated with our financial results from the date of acquisition.
Through RegistryPro, a joint venture with the U.K.-based registrar
Virtual Internet plc, we are establishing a registry for the new gTLD .pro,
which will be dedicated to certified professionals such as lawyers, doctors and
accountants. We currently own 50% of the equity in RegistyPro. We also have a
small equity stake in Afilias, the consortium of 18 registrars, which was
selected to manage the registry for the new gTLD .info. We currently expect each
of these new registries to launch in the second half of 2001, although their
launch is dependent on finalizing contract negotiations with ICANN and is not
assured.
Net Revenues
We derive our net revenues from domain name registrations, online
products and services and advertising. Net revenues from domain name
registrations consist of fees paid by registrants over the course of the
registration period reduced by referral commissions and a provision for credit
card chargebacks. We currently earn registration fees in connection with new,
renewal, extended and transferred registrations. From June 1999 until January
14, 2000, we offered two-year registration periods for initial domain name
registrations in the .com, .net and .org domains with annual renewals and either
one- or two-year registration periods for domain names in the country code
domains. Beginning January 15, 2000, we expanded our registration period
offerings to include one-, five- and ten-year registration periods for initial
domain name registrations in the .com, .net and .org domains. Renewal and
extension registration periods can be from one to ten years. Our standard
pricing for .com, .net and .org domain names is currently $35 per year through
our www.register.com website. We currently charge approximately $40 to
45
$200 for one- or two-year country code domain names registered through our
www.register.com website. From time to time we run promotional campaigns to
acquire additional registrations and customers, including significant free
promotions which we ran during the third quarter of 2000. We charge the same
rates for renewals as we do for corresponding initial registration periods.
Because we only began operating as a registrar in April 1999, we have processed
a limited number of registration renewals. We anticipate that registration
renewals will contribute to our net revenues as our customers' initial
registrations reach the end of their terms and a portion of these customers
renew their registrations.
In addition to our standard registration fees, we have a number of
different fee structures for our domain registration services. Our Corporate
Services division delivers a diversified range of higher-priced services for our
corporate customers and extends bulk discounts for domain name registrations and
transfers. We pay referral commissions based on a percentage of the net
registration revenues derived from registrations processed through the
participants in our network of co-brand websites and those we process through
our www.register.com website referred to us by participants in our affiliate
network. Participants in our network of private label websites pay us a fee per
registration, discounted off of our standard registration fee. In August 2000,
we added product and service offerings to expand into different segments of the
domain name registration market which we did not previously serve. These include
registrations targeted for bulk customers and registered through NameBargain.com
at a substantial discount to our standard registration fees and the use of
domain names for consumers at no charge registered through NameDemo.com limiting
the customer to one name per user as identified by a unique email address and
are offered for a duration of one year. Each of these new offerings includes a
reduced level of customer service and limited value-added products or services.
We stopped accepting new registrations through NameDemo.com in February 2001 so
that we could evaluate its effectiveness as a customer acquisition tool as we
continue to encourage our NameDemo customers to register their domain names
through our www.register.com website.
Domain name registration revenues are deferred at the time of the
registration and are recognized ratably over the term of the registration
period. Under this subscription-based model, we recognize revenue when we
provide the registration services, including customer service and maintenance of
the individual domain name records. We require prepayment via credit card for
all online domain name registration sales, which provides us with the full cash
fee at the beginning of the registration period while recognizing the revenues
over the registration period. For some of our customers who register domain
names through our Corporate Services department and for some participants in our
network of private label websites, we establish lines of credit based on credit
worthiness.
Online products and services, which primarily consist of email, domain
name forwarding, web-hosting, site submission to search engines and software,
are sold either as annual or monthly subscriptions, depending on the product or
service offering. These revenues are recognized ratably over the period in which
we provide our services. Our software revenues consist solely of software sales
by our Inabox subsidiary. To date, these software revenues have not been
material and we do not expect these revenues to be material for the foreseeable
future. We offer web-hosting through our own servers and through web-hosting
services provided by third parties. In 1999, we shifted our business model and
have chosen to direct our resources toward our domain name registration business
and not toward our own web-hosting business. As such, while we continue to offer
our own web-hosting services, we do not actively promote this service
46
and, therefore, do not anticipate significant revenue growth from our own
web-hosting service in future periods. We intend, however, to continue actively
promoting web-hosting services provided by third parties.
Advertising revenues are derived from the sale of sponsorships and
banner advertisements under short-term contracts that range from one month to
one year in duration. We recognize these revenues ratably over the period in
which the advertisements are displayed provided that no significant company
obligation remains and collection of the resulting receivable is probable.
Cost of Revenues
Our cost of revenues consists of the costs associated with providing
domain name registrations and online products and services. Cost of revenues for
domain name registrations primarily consists of registry fees, depreciation on
the equipment used to process the domain name registrations, the fees paid to
the co-location facilities maintaining our equipment and fees paid to the
financial institutions to process credit card payments on our behalf. Through
January 14, 2000, we paid a $9 per year registry fee for each .com, .net and
.org domain name registration. This fee was reduced to $6 per year effective
January 15, 2000. We currently pay registry fees of approximately $5 to $160
for one- or two-year country code domain name registrations registered through
our www.register.com website. The largest component of our cost of revenues is
the registry fees which, while paid in full at the time that the domain name is
registered, are recorded as a prepaid expense and recognized ratably over the
term of the registration.
Cost of revenues for our online products and services consists of fees
paid to third-party service providers, depreciation on the equipment used to
deliver the services, fees paid to the co-location facilities maintaining our
equipment and fees paid to the financial institutions to process credit card
payments on our behalf.
There are no material costs associated with our software revenues.
While we have no direct cost of revenues associated with our
advertising revenue, we do incur operational costs including salaries and
commissions, which are classified as operating expenses. We have no incremental
cost of revenues associated with advertising since we use the same equipment to
deliver the advertisements as we use for our domain name registration services.
Operating Expenses
Our operating expenses consist of sales and marketing, research and
development, general and administrative, non-cash compensation expenses, and
amortization of goodwill and other intangible assets. Our sales and marketing
expenses consist primarily of employee salaries, marketing programs such as
advertising, registry fees associated with the domain names registered through
NameDemo.com or as part of our promotional campaigns which offered free
registrations and, to a lesser extent, commissions paid to our sales
representatives. Research and development expenses consist primarily of employee
salaries, fees for outside consultants and related costs associated with the
development and integration of new products and services, the enhancement of
existing products and services and quality assurance. General and
47
administrative expenses, excluding non-cash compensation, consist primarily of
employee salaries and other personnel-related expenses for executive, financial
and administrative personnel, as well as professional services fees and bad debt
accruals. Non-cash compensation expenses are related to grants of stock options
and warrants made to employees, directors, consultants and vendors. Facilities
expenses are allocated across our different operating expense categories. In
addition to the $150,000, $4.9 million and $2.2 million of non-cash compensation
expenses recorded in 1998, 1999 and 2000, respectively, we will record
approximately $4.2 million in additional non-cash compensation charges through
2004 as follows: $1.7 million in each of 2001 and 2002, $714,000 in 2003 and
$59,000 in 2004. These charges primarily relate to the issuance of employee
stock options having exercise prices below fair market value on the date of
grant. Under current accounting rules, we will record approximately $53.8
million of additional amortization of goodwill and other intangibles in
connection with our acquisitions of Inabox, Inc. and Afternic.com, Inc., through
2004 as follows: $15.5 million in each of 2001 and 2002, $14.3 million in 2003
and $8.5 million in 2004. The non-cash compensation charges and amortization
charges will reduce our earnings or increase our losses, as applicable, in
future periods.
Net Income (Losses)
We have incurred annual losses from our operations since our inception.
We incurred net losses of $1.2 million and $8.8 million for the years ended
December 31, 1998 and 1999, respectively. We had net income of $270,000 for the
year ended December 31, 2000. Although we achieved profitability for the year
ended December 31, 2000, this profitability was due, in part, to a one-time gain
of $4.6 million from the sale of our investment in a private company and the
recognition of interest income. Accordingly, although we were profitable for the
year ended December 31, 2000, we cannot assure you that we will be able to
sustain or increase our profitability in the future.
Results of Operations
Because we only began operating as a domain name registrar in the
second quarter of 1999 and generated only limited revenues from domain name
registration services prior to this time, we believe that comparisons of 1999
against 2000 is not meaningful and you should not rely upon it as an indication
of our future performance. Furthermore, given the rapidly evolving nature of our
business and our limited operating history as a competitive registrar, our
operating results are difficult to forecast, and period-to-period comparisons of
our prior operating results will not be meaningful and should not be relied upon
as an indication of future performance. The nascent state of the domain name
registration market, events in the market such as the introduction of new
generic top level domains and other factors, many of which are outside our
control, may cause our operating results to fluctuate significantly in the
future.
We anticipate that in future periods, net revenues from domain name
registrations will continue to be the largest component of our net revenues, and
cost of domain name registrations will continue to be the largest component of
our cost of revenues.
48
Years Ended December 31, 1999 and 2000
Net Revenues
Total net revenues increased from $9.6 million for the year ended
December 31, 1999 to $86.1 million for the year ended December 31, 2000.
Domain name registrations. Revenues from domain name registrations
increased from $4.5 million for 1999 to $70.8 million for 2000. This increase
was primarily due to the shift in our business from serving as a distributor of
domain names to serving as a registrar for generic top level domain names in
June 1999. Additionally, we had $32.1 million of deferred revenue from domain
name registrations at December 31, 1999, increasing to $86.8 million at December
31, 2000.
In the first quarter of 2000 we registered approximately 923,000 new
domain names in the .com, .net and .org and country code domains. In the second
quarter of 2000 we registered approximately 710,000 new domains names in these
domains. In the third quarter of 2000 we registered approximately 842,000 new
domain names in these domains, including a significant number of free
promotions. In the fourth quarter of 2000 we registered approximately 655,000
new and transferred domain names in these domains. Our number of paid domain
name registrations (and, therefore, our cash bookings) decreased sequentially
each quarter since the first quarter of 2000. We believe that the growth rate
experienced in the domain name registration market in late 1999 and 2000 is not
an indication of anticipated future growth rates. During that period substantial
numbers of domain name registrations were driven by factors including: (i) the
recognition by businesses that they needed to establish an online presence; (ii)
significant registration activity by domain name speculators, who register names
with the intention of reselling them rather than putting them to use; and (iii)
extremely strong growth in new business start-ups in the Internet sector. In
late 2000, the domain name registration market's growth rate began to decrease;
however, we expect it to normalize in the future.
Looking forward, we believe that the introduction of new gTLDs will be
an important driver of the future growth of the domain name registration market.
We believe that there is a natural absorption of the new gTLDs and that anything
in excess of this absorption will be primarily a function of the success of
marketing efforts. Consequently, we anticipate that as each new gTLD is
introduced, there will be an initial spike in new registrations, which will
level off over time. We anticipate that registration renewals will contribute to
our revenues from domain name registrations as our customers' initial
registrations reach the end of their terms and a portion of these customers
renew their registrations. We also believe that a large number of the names
registered in 1999 and 2000 were registered by domain name speculators who
register names with the intention of reselling them rather than putting them to
use. As a result, we expect that a significant percentage of the currently
existing domain name registrations will not be renewed and will be allowed to
lapse. Over time, as the percentage of names held by speculators decreases, we
expect to see an increase in the renewal rates across the industry. Taking into
account all of these market dynamics, we anticipate that revenues from domain
name registrations will continue to increase.
Online Products and Services. Revenues from online products and
services increased 42.9% from $2.1 million for 1999 to $3.0 million for 2000.
The increase resulted primarily from increased sales of email and domain name
forwarding services. We anticipate that revenues
49
from online products and services will remain relatively flat in the near term,
but that these revenues will increase over the long term as we expand our online
product and service offerings.
Advertising. Revenues from advertising increased from $3.1 million for
1999 to $12.3 million for 2000, primarily from the increased number of page
views and the volume of advertising and sponsorships sold on our
www.register.com, FirstStepSite and FutureSite websites. We anticipate that
revenues from advertising in future periods will increase only moderately as we
face increasing challenges in the Internet advertising market. We believe that
these challenges will be more than offset by the attractiveness of our paying
customer base to potential advertisers, as well as the availability of
additional advertising space on our Afternic.com, and NameBargain.com websites.
Cost of Revenues
Total cost of revenues increased from $3.1 million for 1999 to $23.9
million for 2000.
Cost of Domain Name Registrations. Cost of domain name registrations
increased from $2.5 million for the year ended December 31, 1999 to $23.5
million for the year 2000. The increase was primarily due to the shift in our
business from serving as a distributor of domain names to serving as a registrar
for generic top level domain names in June 1999. As a distributor, we generally
passed through registry costs to the applicable registry or registrar. We
anticipate that cost of revenues for domain name registrations will continue to
increase, tracking the growth in our domain name registrations and renewals.
Cost of Online Products and Services. Cost of online products and
services decreased $158,000 from $548,000 for 1999 to $390,000 for 2000 due
primarily to cost cutbacks and renegotiated contracts with certain vendors. We
anticipate that these costs will increase over the long term as we expand our
online products and services offerings.
Operating Expenses
Total operating expenses increased from $16.2 million for 1999 to $71.9
million for 2000.
Sales and Marketing. Sales and marketing expenses increased from $7.1
million for 1999 to $47.3 million for 2000. The increase was primarily due to
the costs associated with our radio, print media and television advertising
campaigns. The radio and print campaign was launched in September 1999, while
the television campaign began in May 2000. The increase is also due to (i)
salaries associated with newly hired sales, marketing and customer service
professionals and (ii) the registry fees associated with (a) registrations
effected through NameDemo.com (which was launched in August 2000) and (b) free
registrations offered through promotional campaigns run principally in September
2000. We anticipate that sales and marketing expenses will remain relatively
flat in the near term as we continue to expand into new markets, but take a more
targeted marketing (as opposed to brand building) approach and focus our efforts
on improving customer retention and lowering acquisition costs.
Research and Development. Research and development expenses increased
from $1.8 million for 1999 to $5.6 million for 2000. The increase resulted
primarily from salaries
50
associated with new personnel in technology to support our growth. We anticipate
that research and development expenses will continue to increase as we develop
and modify our systems to accommodate growth in our business.
General and Administrative. General and administrative expenses,
exclusive of non-cash compensation, increased from $2.4 million for 1999 to
$11.3 million for 2000. The increase was primarily due to salaries associated
with newly hired personnel and related costs required to manage our growth and
facilities expansion. We expect that our general and administrative expenses
will increase as appropriate to support our overall growth. Non-cash
compensation expenses, included herein, decreased from $4.9 million for 1999 to
$2.2 million for 2000. In 1999, the expense was primarily associated with the
modification of warrants previously granted to some of our stockholders and the
issuance of warrants in connection with a financial consulting agreement, and a
minimal portion of the expense was the result of the amortization of deferred
compensation related to employee stock options. In 2000, the non-cash
compensation expense was primarily attributable to the amortization of deferred
compensation related to employee stock options. Based principally on grants of
stock options and warrants made to date, we will record approximately $4.2
million of additional non-cash compensation through 2004 as follows: $1.7
million in each of 2001 and 2002, $714,000 in 2003 and $59,000 in 2004.
Amortization of Goodwill and Other Intangibles. Amortization of
goodwill and other intangibles was $5.6 million for 2000 and related to the
goodwill and intangibles associated with our acquisitions of Inabox and
Afternic.com. Under current accounting rules, we will record approximately $53.8
million of additional amortization of goodwill and other intangibles through
2004 as follows: $15.5 million in each of 2001 and 2002, $14.3 million in 2003
and $8.5 million in 2004. We had no amortization of goodwill and other
intangibles for 1999.
Other Income, Net
Other Income (expenses), net. Other income, net consisted primarily of
interest income, net of interest expense increased from $0.9 million for 1999 to
$9.5 million for 2000. The increase was primarily due to interest earned on our
cash balance as a result of our equity financings, including our initial public
offering, and cash provided by operations.
Gain on Sale of Investment. Gain on sale of investment of $4.6 million
for 2000 was the result of the gain on sale of shares of a private company after
that company was acquired by a public company. We had no gain on sale of
investment in 1999.
Income Tax Expense
Income tax expense was $4.2 million for 2000 due to the other income,
net, described above and the fact that the amortization of goodwill and other
intangibles is not deductible for income tax purposes. There was no income tax
expense for 1999 due to our operating loss, the absence of amortization of
goodwill and other intangibles and the relatively small amount of other income,
net.
51
Net Income (loss)
Net income for 2000 was $270,000 compared to a net loss for 1999 of
$8.8 million.
Years Ended December 31, 1998 and 1999
Net Revenues
Total net revenues increased from $1.3 million for 1998 to $9.6 million
for 1999.
Domain Name Registrations. Revenues from domain name registrations
increased from $37,000 for 1998 to $4.5 million for 1999. Domain name
registrations represented 3% of 1998 net revenues and 46% of 1999 net revenues.
This increase was primarily from the shift in our business from serving as a
distributor of domain names to serving as a generic top level domain name
registrar in June 1999. Additionally, we had no deferred revenue from domain
name registrations in 1998 while deferred revenue was $32.1 million in 1999.
Online Products and Services. Revenues from online products and
services increased 91% from $1.1 million in 1998 to $2.1 million for 1999
primarily from increased sales of web hosting provided through our servers.
Online products and services represented 87% of 1998 net revenues and 22% of
1999 net revenues.
Advertising. Revenues from advertising increased from $133,000 for 1998
to $3.1 million for 1999 primarily from the increased number of page views and
the volume of advertising and sponsorships sold on our www.register.com and
FutureSite websites. Advertising represented 10% of 1998 net revenues and 32% of
1999 net revenues.
Cost of Revenues
Total cost of revenues increased from $461,000 for 1998 to $3.1 million
for 1999.
Cost of Domain Name Registrations. Cost of domain name registrations
increased from $19,000 for 1998 to $2.5 million for 1999. The increase was
primarily from the shift in our business from serving as a distributor of domain
names to serving as a generic top level domain name registrar in June 1999. As a
distributor, we generally passed through registry costs to the applicable
registry or registrar.
Cost of Online Products and Services. Cost of online products and
services increased 24% from $442,000 for 1998 to $548,000 for 1999. The increase
was primarily from the additional depreciation expense associated with the
equipment dedicated to our operations to support our growing online product and
service offerings.
Operating Expenses
Total operating expenses increased from $2.1 million for 1998 to $16.2
million for 1999.
Sales and Marketing. Sales and marketing expenses increased from
$864,000 for 1998 to $7.1 million for 1999. The increase was primarily from the
costs associated with the launch of
52
our radio and print media advertising campaign in September 1999 and from
salaries associated with newly hired sales, marketing and customer service
professionals.
Research and Development. Research and development expenses increased
from $277,000 for 1998 to $1.8 million for 1999. The increase resulted primarily
from salaries associated with newly hired technology personnel to support our
growth.
General and Administrative. General and administrative expenses,
exclusive of non-cash compensation, increased from $795,000 for 1998 to $2.4
million for 1999. The increase was primarily from salaries associated with newly
hired personnel and related costs required to manage our growth and facilities
expansion. Non-cash compensation expenses, included herein, increased from
$150,000 for 1998 to $4.9 million for 1999. The increase in non-cash
compensation was primarily associated with the modification of warrants
previously granted to some of our stockholders and the issuance of warrants in
connection with a financial consulting agreement. Non-cash compensation expense
included $18,000 in 1998 and $329,000 in 1999 of amortization of deferred
compensation related to employee stock options.
Other Income (Expenses), Net.
Other income (expenses), net consists primarily of interest income net
of interest expense. Other income (expenses), net increased from $67,000 for
1998 to $887,000 for 1999. The increase was primarily from interest earned on
our cash balance as a result of our equity financings and cash provided by
operations.
Net Loss
Net loss increased $7.6 million to $8.8 million in 1999 from $1.2
million in 1998.
Quarterly Results of Operations
The following table sets forth selected unaudited quarterly statements
of operations data, in dollar amounts and as percentages of net revenue, for the
four quarters ended December 31, 1999 and for the four quarters ended December
31, 2000. In our opinion this information has been prepared substantially on the
same basis as the audited financial statements appearing elsewhere in this
annual statement, and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to present
fairly the unaudited quarterly results of operations data. The quarterly data
should be read with our financial statements and the notes to those statements
appearing elsewhere in this annual statement and in our prospectus. The
operating results for any quarter are not necessarily indicative of results for
any future period.
53
Three Months Ended
-------------------------------------------------------------------------------------------------
March 31, June 30, September December March 31, June 30, September December
1999 1999 30, 1999 31, 1999 2000 2000 30, 2000 31, 2000
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Net revenues................. $ 747 $ 1,521 $ 2,187 $ 5,189 $ 12,418 $ 20,250 $ 24,572 $ 28,870
Cost of revenues............. 92 233 1,097 1,661 4,101 5,287 6,546 7,935
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit................. 655 1,288 1,090 3,528 8,317 14,963 18,026 20,935
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating costs and expenses
Sales and marketing....... 720 998 2,898 2,534 7,173 14,980 14,309 10,849
Research and development.. 267 357 470 673 718 1,236 1,354 2,272
General and
administrative
(including non-cash
compensation of $586,
$3,945, $41, $357,
$832, $458, $445, and
$438, respectively)..... 788 4,144 594 1,783 2,530 2,102 4,064 4,738
Amortization of goodwill
and other intangibles - - - - - 299 1,390 3,894
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating costs and
expenses.................. 1,775 5,499 3,962 4,990 10,421 18,617 21,117 21,753
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations......... (1,120) (4,211) (2,872) (1,462) (2,104) (3,654) (3,091) (818)
Other income (expenses), net. 13 71 336 468 1,113 2,662 2,946 2,799
Gain on sale of investment... - - - - - - - 4,603
Income tax expense........... - - - - - - - (4,187)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............ $ (1,107) $ (4,140) $ (2,536) $ (994) $ (991) $ (992) $ (145) $ 2,397
========== ========== ========== ========== ========== ========== ========== ==========
Basic (loss) earnings
per share............... (0.06) (0.23) (0.15) (0.05) (0.04) (0.03) (0.00) 0.07
========== ========== ========== ========== ========== ========== ========== ==========
Weighted average shares
used in basic (loss)
earnings per share...... 17,295,882 18,193,318 17,295,882 20,841,732 24,180,105 31,623,494 32,810,931 36,775,701
========== ========== ========== ========== ========== ========== ========== ==========
Diluted (loss) earnings
per share............... (0.06) (0.23) (0.15) (0.05) (0.04) (0.03) (0.00) 0.06
========== ========== ========== ========== ========== ========== ========== ==========
Weighted average shares
used in diluted (loss)
earnings per share...... 17,295,882 18,193,318 17,295,882 20,841,732 24,180,105 31,623,494 32,810,931 42,763,561
========== ========== ========== ========== ========== ========== ========== ==========
Three Months Ended
-------------------------------------------------------------------------------------------------
March 31, June 30, September December March 31, June 30, September December
1999 1999 30, 1999 31, 1999 2000 2000 30, 2000 31, 2000
--------- -------- ---------- --------- --------- -------- --------- --------
Net revenues................. 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues............. 12 15 50 32 33 26 27 27
------- ------- -------- --------- -------- -------- -------- --------
Gross profit................. 88 85 50 68 67 74 73 73
------- ------- -------- --------- -------- -------- -------- --------
Operating costs and expenses
Sales and marketing....... 96 66 133 49 58 82 58 38
Research and development.. 36 24 21 13 6 6 6 8
General and
administrative
(including non-cash
compensation)........... 106 272 27 34 20 10 17 17
Amortization of goodwill
and other intangibles - - - - - 1 5 13
------- ------- -------- --------- -------- -------- -------- --------
Total operating costs and
expenses.................. 238 362 181 96 84 99 86 76
------- ------- -------- --------- -------- -------- -------- --------
Loss from operations......... (150) (277) (131) (28) (17) (25) (13) (3)
Other income (expenses), net. 2 5 15 9 9 13 12 10
Gain on sale of investment... - - - - - - - 16
Income tax expense........... - - - - - - - (15)
------- ------- -------- --------- -------- -------- -------- --------
Net income (loss)............ (148)% (272)% (116)% (19)% (8)% (12)% (1)% 8%
======= ======= ======== ========= ======== ======== ======== ========
Liquidity and Capital Resources
Historically, we have funded our operations and met our capital
expenditure requirements primarily through sales of equity securities, cash
generated from operations and borrowings. We issued 5,222,279 shares of our
common stock to the public on March 3, 2000, which generated approximately
$115.3 million after deducting the underwriting discount and other offering
expenses.
54
At December 31, 2000, the combined total of our (i) cash and cash
equivalents, (ii) short-term investments and (iii) available-for-sale securities
totaled $173.4 million. This is compared to $45.7 million at December 31, 1999.
Our business generated $31.9 million of cash from operations in 2000
compared to $22.4 million in 1999. The increase in cash generated from
operations was primarily due to increased domain name registrations.
Net cash used for investing activities was $129.2 million in 2000
compared to $7.7 million in 1999. In 2000, approximately 84% of the cash used
for investing activities related to our purchase of short-term investments and
available-for-sale securities while the balance related primarily to our
acquisitions of Inabox and Afternic.com, an investment in a privately held
company, the purchase of property and equipment and investment in our systems
infrastructure. In 1999 cash used for investment activities related primarily to
our investment in short-term securities and the purchase of property and
equipment and investment in our systems infrastructure.
Net cash provided by financing activities totaled $116.5 million in
2000 compared to $24.9 million in 1999. In 2000 substantially all of the
financing activities were attributable to our initial public offering of our
common stock. In 1999 substantially all of the financing activities were private
sales of equity securities.
Although we have no material commitments for capital expenditures or
other long-term obligations, we anticipate that we will increase our capital
expenditures and lease commitments consistent with our anticipated growth in
operations, infrastructure and personnel, including the addition of new products
and services, implementation of additional co-location facilities and various
capital expenditures associated with expanding our facilities. We currently
anticipate that we will continue to experience growth in our operating expenses
for the foreseeable future and that our operating expenses will be a material
use of our cash resources. We believe that our existing cash and cash from
operations will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk is limited to interest income sensitivity,
which is affected by changes in the general level of U.S. interest rates. We
believe that we are not subject to any material interest rate risk because all
of our investments are in fixed-rate, short-term securities having a maturity of
not more than two years with a majority having a maturity of under one year. The
fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the fixed-rate, short-term nature of the
substantial majority of our investment portfolio. We did not have any foreign
currency hedging or derivative instruments at December 31, 2000.
We generally do not enter into financial instruments for trading or
speculative purposes and do not currently utilize derivative financial
instruments. In one instance in 2000, we purchased a put on shares of a public
company that had acquired a privately owned company in which we had an
investment. We subsequently sold the put at a profit and also sold the shares of
55
the underlying company at a profit. While we have no present intention of
utilizing derivative financial instruments in the future, it is possible that we
may enter into similar transactions under comparable circumstances, should they
arise. We have no long-term debt.
56
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of PricewaterhouseCoopers LLP, Independent Accountants............F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000.............F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000....................................F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1999 and 2000................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000....................................F-7
Notes to Consolidated Financial Statements...............................F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Register.com, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Register.com, Inc. at December 31, 1999 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 16, 2001
F-2
REGISTER.COM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------------
1999 2000
---------------- ----------------
Assets
Current Assets
Cash and cash equivalents........................................ $ 40,944,122 $ 60,155,747
Short-term investments........................................... 4,723,050 65,283,178
Accounts receivable, less allowance of $314,516 and $1,748,824,
respectively................................................... 2,516,186 6,596,089
Prepaid domain name registry fees................................ 4,954,730 16,855,163
Deferred tax asset, net.......................................... 8,578,045 20,754,301
Deferred offering costs.......................................... 390,000 -
Prepaid income taxes............................................. - 3,774,077
Other current assets............................................. 195,196 2,974,136
---------------- ----------------
Total current assets 62,301,329 176,392,691
Fixed assets, net................................................... 2,458,386 9,371,754
Prepaid domain name registry fees, net of current portion........... 3,576,331 4,423,227
Other investments................................................... - 600,000
Available-for-sale securities....................................... - 47,980,150
Goodwill and other intangibles, net................................. - 53,848,813
---------------- ----------------
Total assets $ 68,336,046 $ 292,616,635
================ ================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses............................ $ 8,513,079 $ 13,502,152
Income taxes payable............................................. 5,608,198 -
Deferred revenue, net............................................ 18,193,871 69,026,927
Capital lease obligations, current portion....................... 5,967 -
Other current liabilities........................................ 166,857 1,703,767
---------------- ----------------
Total current liabilities 32,487,972 84,232,846
Deferred revenue, net of current portion............................ 13,907,361 19,489,288
Capital lease obligations, net of current portion................... 27,858 -
---------------- ----------------
Total liabilities 46,423,191 103,722,134
---------------- ----------------
Commitments and contingencies
Stockholders' equity
Preferred stock--$.0001 par value, 5,000,000 shares authorized;
Series A convertible preferred; 4,694,333 issued and
outstanding at December 31, 1999 and none issued and
outstanding at December 31, 2000............................... 469 -
Common stock--$.0001 par value, 200,000,000 shares authorized;
21,065,047 issued and outstanding at December 31, 1999 and
36,823,281 issued and outstanding at December 31, 2000......... 2,106 3,682
Additional paid-in capital....................................... 36,709,821 204,676,750
Unearned compensation............................................ (2,647,770) (4,287,988)
Accumulated other comprehensive income........................... - 384,020
Accumulated deficit.............................................. (12,151,771) (11,881,963)
---------------- ----------------
Total stockholders' equity 21,912,855 188,894,501
---------------- ----------------
Total liabilities and stockholders' equity $ 68,336,046 $ 292,616,635
================ ================
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
REGISTER.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
------------------------------------------------------
1998 1999 2000
--------------- --------------- ---------------
Net revenues............................................ $ 1,319,359 $ 9,644,552 $ 86,109,514
Cost of revenues........................................ 461,152 3,082,499 23,868,757
--------------- --------------- ---------------
Gross profit......................................... 858,207 6,562,053 62,240,757
--------------- --------------- ---------------
Operating costs and expenses
Sales and marketing.................................. 863,720 7,149,693 47,311,275
Research & development............................... 276,687 1,767,158 5,580,131
General & administrative (including non-cash
compensation of $149,682, $4,929,200 and
$2,173,421, respectively).......................... 945,107 7,309,390 13,433,737
Amortization of goodwill and other intangibles....... - - 5,582,202
--------------- --------------- ---------------
Total operating costs and expenses................. 2,085,514 16,226,241 71,907,345
--------------- --------------- ---------------
Loss from operations.................................... (1,227,307) (9,664,188) (9,666,588)
Other income (expenses), net............................ 66,559 887,270 9,519,597
Gain on sale of investment.............................. - - 4,603,457
--------------- --------------- ---------------
(Loss) income before provision for income taxes......... (1,160,748) (8,776,918) 4,456,466
Provision for income taxes.............................. - - (4,186,658)
--------------- --------------- ---------------
Net (loss) income.................................. (1,160,748) (8,776,918) 269,808
Other comprehensive (loss) income
Unrealized gain on marketable securities........... - - 384,020
--------------- --------------- ---------------
Comprehensive (loss) income........................ $ (1,160,748) $ (8,776,918) $ 653,828
=============== =============== ===============
Basic (loss) earnings per share.................... $ (0.07) $ (0.46) $ 0.01
=============== =============== ===============
Weighted average shares used in basic (loss)
earnings per share............................... 15,697,013 19,117,027 31,393,613
=============== =============== ===============
Diluted (loss) earnings per share.................. $ (0.07) $ (0.46) $ 0.01
=============== =============== ===============
Weighted average shares used in diluted (loss)
earnings per share............................... 15,697,013 19,117,027 39,183,902
=============== =============== ===============
Pro forma basic earnings per share................. $ 0.01
Weighted average shares used in pro forma basic
earnings per share............................... 32,191,006
===============
Pro forma diluted earnings per share............... $ 0.01
===============
Weighted average shares used in pro forma diluted
earnings per share............................... 39,981,296
===============
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
REGISTER.COM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Exchangeable Preferred Series A Convertible
Stock Preferred Stock Common Stock
------------------------ ------------------------ -------------------------
Shares Amount Shares Amount Shares Amount
-------- --------- ---------- --------- ----------- ---------
Balance at January
1, 1998.............. - $ - - $ - 8,895,418 $ 889
Issuance of common
stock in exchange
for accrued
compensation....... - - - - 945,000 95
Exercise of warrants
issued in
connection with
stockholder loans.. - - - - 411,766 41
Conversion of
stockholder note
payable............ - - - - 123,529 12
Sale of common stock. - - - - 6,906,666 691
Issuance of common
stock in exchange
for services....... - - - - 13,503 1
Issuance of common
stock warrants for
services........... - - - - - -
Issuance of
compensatory stock
options............ - - - - - -
Amortization of
unearned
compensation....... - - - - - -
Net loss............. - - - - - -
-------- --------- ---------- --------- ----------- ---------
Balance at December
31, 1998............. - - - - 17,295,882 1,729
Sale of exchangeable
preferred stock.... 1,499,999 150 - - - -
Sale and issuance of
common stock and
warrants........... - - - - 2,041,666 204
Sale and issuance of
Series A
convertible
preferred stock
and warrants....... - - 4,694,333 469 - -
Conversion of
exchangeable
preferred stock to
common stock....... (1,499,999) (150) - - 1,499,999 150
Issuance of common
stock and warrants
for services....... - - - - - -
Accumulated
Additinal other
Paid-in Unearned comprehensive Accumulated
Capital Compensation income Deficit Total
------------ ------------ --------- ------------- -------------
Balance at January
1, 1998.............. $1,150,545 $ - $ - $(2,214,105) $(1,062,671)
Issuance of common
stock in exchange
for accrued
compensation....... 261,571 - - - 261,666
Exercise of warrants
issued in
connection with
stockholder loans.. 99,959 - - - 100,000
Conversion of
stockholder note
payable............ 44,107 - - - 44,119
Sale of common stock. 2,490,041 - - - 2,490,732
Issuance of common
stock in exchange
for services....... 5,786 - - - 5,787
Issuance of common
stock warrants for
services........... 28,887 - - - 28,887
Issuance of
compensatory stock
options............ 220,975 (123,475) - - 97,500
Amortization of
unearned
compensation....... - 17,508 - - 17,508
Net loss............. - - - (1,160,748) (1,160,748)
------------ ------------ --------- ------------- -------------
Balance at December
31, 1998............. 4,301,871 (105,967) - (3,374,853) 822,780
Sale of exchangeable
preferred stock.... 2,840,625 - - - 2,840,775
Sale and issuance of
common stock and
warrants........... 6,693,293 - - - 6,693,497
Sale and issuance of
Series A
convertible
preferred stock
and warrants....... 15,289,552 - - - 15,290,021
Conversion of
exchangeable
preferred stock to
common stock....... - - - - -
Issuance of common
stock and warrants
for services....... 721,858 - - - 721,858
F-6
REGISTER.COM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (cont'd)
Exchangeable Preferred Series A Convertible
Stock Preferred Stock Common Stock
------------------------ ------------------------ -------------------------
Shares Amount Shares Amount Shares Amount
-------- --------- ---------- --------- ----------- ---------
Issuance of
compensatory stock
options.............. - - - - - -
Amortization of
unearned
compensation....... - - - - - -
Modification of
common stock and
warrants........... - - - - - -
Exercise of employee
stock options...... - - - - 175,000 18
Exercise of warrants. - - - - 52,500 5
Net loss............. - - - - - -
-------- --------- ---------- --------- ----------- ---------
Balance at December
31, 1999............. - - 4,694,333 469 21,065,047 2,106
Sale and issuance of
common stock....... - - - - 5,222,279 522
Issuance of common
stock for
acquisitions 4,658,308 466
Conversion of
exchangeable
preferred stock to
common stock....... - - (4,694,333) (469) 4,694,333 469
Issuance of
compensatory stock
options............ - - - - - -
Issuance of shares
for the Employee
Stock Purchase Plan - - - - 33,619 3
Amortization of
unearned
compensation....... - - - - - -
Exercise of stock
options, net of
related tax benefit - - - - 427,457 43
Exercise of warrants. - - - - 722,238 73
Net unrealized
holding gain in
marketable
securities......... - - - - - -
Net income........... - - - - - -
-------- --------- ---------- --------- ----------- ---------
Balance at December
31, 2000............. - $ - - $ - 36,823,281 $ 3,682
======== ========= ========== ========= =========== =========
Accumulated
Additinal other
Paid-in Unearned comprehensive Accumulated
Capital Compensation income Deficit Total
------------ ------------ --------- ------------- -------------
Issuance of
compensatory stock
options.............. 2,871,145 (2,871,145) - - -
Amortization of
unearned
compensation....... - 329,342 - - 329,342
Modification of
common stock and
warrants........... 3,878,000 - - - 3,878,000
Exercise of employee
stock options...... 62,482 - - - 62,500
Exercise of warrants. 50,995 - - - 51,000
Net loss............. - - - (8,776,918) (8,776,918)
------------ ------------ --------- ------------- -------------
Balance at December
31, 1999............. 36,709,821 (2,647,770) - (12,151,771) 21,912,855
Sale and issuance of
common stock....... 115,292,625 - - - 115,293,147
Issuance of common
stock for
acquisitions 47,427,925 47,428,391
Conversion of
exchangeable
preferred stock to
common stock....... - - - - -
Issuance of
compensatory stock
options............ 3,894,547 (3,894,547) - - -
Issuance of shares
for the Employee
Stock Purchase Plan 200,030 - - - 200,033
Amortization of
unearned
compensation....... (80,908) 2,254,329 - - 2,173,421
Exercise of stock
options, net of
related tax benefit 893,222 - - - 893,265
Exercise of warrants. 339,488 - - - 339,561
Net unrealized
holding gain in
marketable
securities......... - - 384,020 - 384,020
Net income........... - - - 269,808 269,808
------------ ------------ --------- ------------- -------------
Balance at December
31, 2000............. $204,676,750 $(4,287,988) $ 384,020 $(11,881,963) $188,894,501
============ ============ ========= ============= ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
REGISTER.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------------------------
1998 1999 2000
--------------- --------------- ---------------
Cash flows from operating activities
Net income (loss)....................................... $ (1,160,748) $ (8,776,918) $ 269,808
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Deferred revenues.................................... 81,489 31,987,705 56,414,983
Depreciation and amortization........................ 121,474 347,860 7,695,756
Compensatory stock options and warrants expense...... 163,797 4,929,200 2,173,421
Deferred income taxes................................ - (8,578,045) (12,176,256)
Changes in assets and liabilities affecting operating
cash flows
Accounts receivable.................................. (54,605) (2,448,677) (4,079,903)
Prepaid domain name registry fees.................... - (8,531,061) (12,747,329)
Prepaid income taxes................................. - - (3,774,077)
Other current assets................................. 22,404 (191,271) (2,778,940)
Other assets......................................... (28,375) 30,643 -
Accounts payable and accrued expenses................ 161,747 2,764,386 2,313,863
Accrued registry fees................................ - 3,175,982 1,133,432
Accrued advertising.................................. - 1,962,235 1,541,779
Income taxes payable................................. - 5,608,198 (5,608,198)
Other current liabilities............................ - 166,857 1,536,910
--------------- --------------- ---------------
Net cash provided by (used in) operating activities (692,817) 22,447,094 31,915,249
--------------- --------------- ---------------
Cash flows from investing activities
Purchases of fixed assets............................ (267,330) (2,543,715) (9,026,922)
Deferred offering costs.............................. - (390,000) 390,000
Purchases of investments............................. - (4,723,050) (128,363,188)
Maturities of investments............................ - - 19,722,910
Acquisitions, net.................................... - - (11,942,927)
--------------- --------------- ---------------
Net cash used in investing activities.............. (267,330) (7,656,765) (129,220,127)
--------------- --------------- ---------------
Cash flows from financing activities
Repayment of notes payable........................... (286,000) (52,040) -
Net proceeds from issuance of common stock and warrants 2,490,732 6,806,999 116,550,328
Net proceeds from issuance of preferred stock and
warrants........................................... - 18,130,796 -
Principal payments on capital lease obligations...... (20,782) (16,610) (33,825)
--------------- --------------- ---------------
Net cash provided by financing activities.......... 2,183,950 24,869,145 116,516,503
--------------- --------------- ---------------
Net increase in cash and cash equivalents............... 1,223,803 39,659,474 19,211,625
Cash and cash equivalents at beginning of period........ 60,845 1,284,648 40,944,122
--------------- --------------- ---------------
Cash and cash equivalents at end of period.............. $ 1,284,648 $ 40,944,122 $ 60,155,747
=============== =============== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest.................................. $ 14,510 $ 6,008 $ 15,493
Cash paid for income taxes.............................. $ - $ 2,969,847 $ 25,261,509
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
REGISTER.COM, INC.
Notes to Financial Statements
1. Nature of Business And Organization
Nature of Business
Register.com, Inc. (the "Company" or "Register.com") provides Internet
domain name registration and other online products and services such as
web-hosting, email, domain name forwarding and advertising. The Company also
markets software for creation of Internet websites.
In April 1999, the Company was selected as one of the initial five
testbed registrars by the ICANN, an independent non-profit organization selected
by the Department of Commerce to manage and oversee the system for generic top
level domain name registration. In June 1999, the Company commenced online
registration as an ICANN-accredited registrar of .com, .net and .org domains.
In June 2000, the Company acquired Inabox, Inc., developers of website
creation software (Note 13). In September 2000, the Company acquired
Afternic.com, Inc., a secondary market exchange for domain names (Note 13). In
September 2000, the Company made an investment in RegistryPro, a joint venture
that has obtained preliminary approval from ICANN to act as the registry for the
.pro generic top level domain, which will be dedicated to certified
professionals (Note 5).
Organization
The Company originally operated as Forman Interactive Corp. ("Forman"),
a New York corporation that was formed in November 1994. Pursuant to a Merger
Agreement dated June 23, 1999 by and among Register.com, a Delaware corporation
formed in May 1999 specifically for the purpose of this merger, and Forman, the
stockholders of Forman exchanged their shares for an equivalent number of shares
of Register.com. References herein to the operations and historical financial
information of the "Company" prior to the date of the merger refer to the
operations and historical financial information of Forman. On March 3, 2000, the
Company sold shares of its common stock through its initial public offering
(Note 6).
Stock Split
In January 2000, the Company effected a 3.5 to 1 stock split. All
common and preferred shares, options, warrants and related per-share data
reflected in the accompanying financial statements and notes thereto have been
adjusted to give retroactive effect to the stock split.
F-8
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Inter-company balances and
transactions have been eliminated.
Cash equivalents
The Company considers all highly liquid investments purchased with an
initial maturity of 90 days or less to be cash equivalents. The Company
maintains its cash balances in highly rated financial institutions. At times,
such cash balances may exceed the Federal Deposit Insurance Corporation limit.
The Company has pledged approximately $3,591,000 of its cash equivalents and
short-term investments as collateral against outstanding letters of credit as of
December 31, 2000.
Investments
The Company classifies the debt securities it has purchased as
available-for-sale in accordance with the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." These securities are carried at fair market value, with
unrealized gains and losses reported in stockholders' equity as a component of
other comprehensive income (loss). Gains or losses on securities sold are based
on the specific identification method.
Securities with maturities of less than one year are classified as
short-term investments, and securities with maturities of greater than a year
are non-current and are classified as available-for-sale securities, within the
consolidated balance sheet.
Fixed assets
Depreciation of equipment and furniture and fixtures is provided for by
the straight-line method over their estimated useful lives of three to five
years. Amortization of leasehold improvements is provided for by the
straight-line method over the shorter of their estimated useful life or the
lease term. The costs of additions and improvements are capitalized, and repairs
and maintenance costs are charged to operations in the periods incurred.
Long-lived assets
The Company reviews for the impairment of long-lived assets whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. If such assets are considered
impaired, the amount of the impairment loss recognized is measured as the amount
by which the carrying value of the asset exceeds the fair value of the asset,
fair
F-9
value being determined based upon discounted cash flows or appraised values,
depending on the nature of the asset. To date, no such impairment losses have
been identified by the Company.
Revenue recognition
The Company's revenues are primarily derived from domain name
registration fees, advertising and online products and services.
Domain name registration fees
Registration fees charged to end-users for registration services are
recognized on a straight-line basis over the life of the registration term for
initial registrations and registration renewals. Substantially all end-user
subscribers pay for services with major credit cards for which the Company
receives daily remittances from the credit card carriers. A provision for
chargebacks from the credit card carriers is included in accounts payable and
accrued expenses. Such amounts are separately recorded and deducted from gross
registration fees in determining net revenues. Referral commissions earned by
the Company's private label and co-brand partners are deducted from gross
registration revenue in determining net revenues.
Online products and services
Revenue from online products and services is recognized on a
straight-line basis over the period in which services are provided. Payments
received in advance of services being provided are included in deferred revenue.
Revenues from escrow services are recognized upon completion of the escrow
service provided.
Advertising
Advertising revenues are derived principally from short-term
advertising contracts in which the Company typically guarantees a minimum number
of impressions or pages to be delivered to users over a specified period of time
for a fixed fee. Advertising revenues are recognized ratably in the period in
which the advertisement is displayed, provided that no significant obligations
remain, at the lesser of the ratio of impressions delivered over total
guaranteed impressions or the straight line basis over the term of the contract.
To the extent that minimum guaranteed impressions are not met, the Company
defers recognition of the corresponding revenues until the guaranteed
impressions are achieved.
Deferred revenue
Deferred revenue primarily relates to the unearned portion of revenues
related to the unexpired term of registration fees, net of an estimate for
credit card chargebacks and external commissions, deferred advertising revenue
and online products and services revenue.
F-10
Prepaid domain name registry fees
Prepaid domain name registry fees represent amounts paid to registries
for .com, .net, .org and country code domains for updating and maintaining the
registries. Domain name registry fees are recognized on a straight-line basis
over the life of the registration term for initial registrations and
registration renewals.
Research and development and software development costs
Research and development costs, other than certain software development
costs, are charged to expense as incurred. Software development costs incurred
subsequent to the establishment of technological feasibility and prior to the
general release of the product or service to the public, are capitalized and
amortized to cost of revenues over the estimated useful life of the related
product or service. Software development costs eligible for capitalization have
not been significant to date.
Advertising costs
The Company expenses the costs of advertising in the period in which
the costs are incurred. Advertising expenses were approximately $228,000,
$4,089,000 and $36,674,000 for the years ended December 31, 1998, 1999 and 2000,
respectively.
Income taxes
The Company recognizes deferred taxes by the asset and liability method
of accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for differences between the financial statement and
tax bases of assets and liabilities at enacted statutory tax rates in effect for
the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
Fair value of financial instruments
The carrying value of cash and cash equivalents, accounts receivable,
and accounts payable approximate fair value due to the relatively short-term
nature of these instruments.
Concentration of credit risk
Concentration of credit risks associated with registration receivables
is limited due to the wide variety and number of customers, as well as their
dispersion across geographic areas. Additionally, the majority of the Company's
net receivables at December 31, 1999 and 2000 are comprised of amounts due from
credit card carriers. The Company has no derivative financial instruments.
F-11
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the management of the Company to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The Company's most significant estimates
relate to the realizability of deferred tax assets and the amortization period
of intangible assets. Actual results could differ from those estimates. The
markets for the Company's products and services are characterized by intense
competition, technology advances and new product/service introductions, all of
which could impact the future realizability of the Company's assets.
Stock based compensation
The Company accounts for employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations ("APB No. 25"). The
Company applies the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") (Note
8).
Earnings (loss) per share
The Company accounts for earnings per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Basic earnings (loss) per share ("Basic EPS") is computed by dividing
net income (loss) available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted earnings (loss)
per share ("Diluted EPS") gives effect to all dilutive potential common shares
outstanding during a period. In computing Diluted EPS, the treasury stock method
is used in determining the number of shares assumed to be purchased from the
conversion of common stock equivalents.
Diluted earnings (loss) per share for the year ended December 31, 1999
does not include the effect of 4,694,333 shares of Series A Convertible
Preferred Stock outstanding because its effect is anti-dilutive. Diluted
earnings (loss) per share for the years ended December 31, 1998 and 1999 does
not include 2,530,850 and 3,277,435, respectively, of stock options outstanding
with exercise prices ranging from $.17 to $1.71 per share because their effects
are anti-dilutive. Additionally, diluted earnings (loss) per share for the years
ended December 31, 1998 and 1999 excludes 3,596,839 and 6,155,675, respectively,
of common shares issuable upon the exercise of outstanding warrants, with
exercise prices ranging from $.01 to $4.08 per share because their effects are
anti-dilutive. Diluted earnings (loss) per share for the year ended December 31,
2000 excludes 147,119 stock options outstanding with exercise prices ranging
from $26.40 to $58.06 per share, because their effects are anti-dilutive.
F-12
The following is a reconciliation from Basic EPS to Diluted EPS for each of the
last three years:
Weighted Average
Net Income Shares EPS
------------------ ------------------ ------------------
2000
Basic $ 269,808 31,393,613 $ 0.01
Effect of dilution:
Stock Options - 2,428,628 -
Warrants - 5,361,661 -
------------------ ------------------ ------------------
Diluted $ 269,808 39,183,902 $ 0.01
------------------ ------------------ ------------------
1999
Basic $ (8,776,918) 19,117,027 $ (0.46)
Effect of dilution:
Stock Options - - -
Warrants - - -
------------------ ------------------ ------------------
Diluted $ (8,776,918) 19,117,027 $ (0.46)
------------------ ------------------ ------------------
1998
Basic $ (1,160,748) 15,697,013 $ (0.07)
Effect of dilution:
Stock Options - - -
Warrants - - -
------------------ ------------------ ------------------
Diluted $ (1,160,748) 15,697,013 $ (0.07)
------------------ ------------------ ------------------
Pro forma information (unaudited)
The pro forma basic and diluted net earnings (loss) per share assumes
the conversion of the Exchangeable Preferred Stock and Series A Convertible
Preferred Stock at the date of original issuance.
Comprehensive income
The Company follows SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This statement requires companies to classify items of their
comprehensive income by their nature in the financial statements and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. There was no difference between net income and comprehensive
income for the year ended December 31, 1999. The difference between net income
and comprehensive income for the year ended December 31, 2000 is $384,020, the
net unrealized gain in marketable securities.
Segment reporting
The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which established
standards for reporting information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company operates in one
business segment.
F-13
Recent accounting pronouncements
In June 2000, the FASB issued SFAS 138, "Accounting for Certain Hedging
Activities", which amended Statement No. 133. "Accounting for Derivative
Instruments and Hedging Activities", Statement 138 must be adopted concurrently
with the adoption of Statement 133. The Company will be required to adopt these
statements for the year ending December 31, 2001. Statements 133 and 138
establish methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
Because the Company currently holds no derivative financial instruments and the
Company does not currently engage in hedging activities, the adoption of these
Statements is not expected to have a material impact on the Company's financial
condition or results of operations.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition".
SAB 101 provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. The additional guidance provided by SAB 101 had
no effect on the Company's financial statements.
3. Fixed Assets
Fixed assets consist of the following:
December 31,
------------
1999 2000
---- ----
Computer equipment.................................................... $2,060,848 $9,254,881
Furniture and fixtures................................................ 93,865 215,740
Office equipment...................................................... 148,287 430,029
Leasehold improvements................................................ 691,743 2,121,015
------- ---------
2,994,743 12,021,665
Less: accumulated depreciation and amortization....................... (536,357) (2,649,911)
---------- ----------
Total fixed assets.................................................... $2,458,386 $9,371,754
========== ==========
F-14
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
December 31,
------------
1999 2000
---- ----
Trade accounts payable................................................ $458,226 $3,025,609
Accrued compensation and benefits..................................... 664,377 1,767,612
Accrued registry fees................................................. 3,175,982 2,042,550
Provision for chargebacks............................................. 894,095 3,258,542
Accrued advertising................................................... 1,962,235 420,456
Accrued professional fees............................................. 990,500 1,019,210
Other................................................................. 367,664 1,968,173
---------- -----------
$8,513,079 $13,502,152
========== ===========
Note 5: Investments
As of December 31, 2000 and 1999, short-term investments and available-for-sale
securities consisted of the following:
Gross Unrealized Gross Unrealized
2000 Fair Value Amortized Cost Holding Gains Holding Losses
------------ -------------- ---------------- ----------------
Short-term investments:
Certificates of deposit $ 15,748,468 $ 15,748,468 $ - $ -
Corporate debt securities 40,151,217 40,245,387 96,961 (2,791)
U.S. government obligations 9,383,493 9,379,508 2,280 (6,265)
------------ ------------ -------- --------
Total short-term investments $ 65,283,178 $ 65,373,363 $ 99,241 $ (9,056)
Available-for-sale securities
Corporate debt securities $ 31,835,286 $ 32,078,446 $249,309 $ (6,149)
U.S. government obligations 11,075,464 11,073,553 4,615 (6,526)
Foreign government obligations 5,069,400 5,121,986 52,586 -
------------ ------------ -------- --------
Total available-for-sale securities $ 47,980,150 $ 48,273,985 $306,510 $ (12,675)
Gross Unrealized Gross Unrealized
1999 Fair Value Amortized Cost Holding Gains Holding Losses
------------ -------------- ---------------- ----------------
Short-term investments:
Certificates of deposit $ 4,723,050 $ 4,723,050 $ - $ -
------------ ------------ -------- --------
Total short-term investments $ 4,723,050 $ 4,723,050 $ - $ -
F-15
The Company classifies its existing debt securities as
available-for-sale in accordance with the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." These securities are carried at fair market value, with
unrealized gains and losses reported in stockholders' equity as a component of
other comprehensive income (loss). Gains or losses on securities sold are based
on the specific identification method. The net unrealized holding gains of
$384,020 on these securities is included in the accumulated comprehensive income
at December 31, 2000.
Securities with maturities of less than one year are classified as
short-term investments, and securities with maturities of greater than a year
are non-current and are classified as available-for-sale securities, within the
consolidated balance sheet.
Other investments consist of a $100,000 investment in RegistryPro, a
joint venture that has obtained preliminary approval from ICANN to act as the
registry for the .pro generic top-level-domain, subject to finalizing contract
negotiations, and $500,000 of convertible preferred stock in a privately held
company.
6. Stockholders' Equity
Authorized Capital
In June 1999, the Company amended its certificate of incorporation to
increase the authorized shares of Common Stock to 25,000,000 and Preferred Stock
to 5,000,000 shares.
In January 2000, the Company amended its certificate of incorporation
to increase the authorized shares of Common Stock to 60,000,000.
In March 2000, the Company amended its certificate of incorporation to
increase the authorized shares of Common Stock to 200,000,000.
Common Stock
In January and May 1998, the Company completed private placements of an
aggregate of 6,440,000 shares of common stock at $.36 per share, providing
proceeds, net of offering expenses, of $2,290,732. In connection with these
placements, the Company issued warrants to acquire an aggregate of 1,143,338
shares of its common stock as a finders fee to two individuals who were members
of two different entities that are principal stockholders of the Company (Note
7). Additionally, the Company issued warrants to acquire up to 2,450,001 shares
of common stock to all stockholders of record prior to the January 1998 private
placement, on a pro rata basis to their stock holdings (Note 7).
In June 1998, the Company completed a private placement of 466,666
shares of common stock at $.43 per share, providing proceeds of $200,000.
In May 1999, the Company completed a private placement of 2,041,666
shares of its common stock and a warrant to acquire 700,000 shares of its common
stock at an exercise price
F-16
of $.01 per share (Note 7), providing gross proceeds of $7,000,000 and proceeds,
net of offering expenses, of $6,693,497. In addition, the Company and the
investor entered into a two-year marketing agreement that allows for
cross-marketing among each of the parties websites (Note 10). In addition, the
Company issued the placement agent in the offering warrants to acquire 308,959
shares of common stock at an exercise price of $4.08 per share (Note 7).
In March 2000, the Company sold 5,222,279 shares of common stock
through its initial public offering, including 222,279 shares as a result of the
underwriters' exercise of their over allotment option. Net proceeds from the
offering and over allotment were approximately $115.3 million, after deducting
the discount granted to the underwriters and other offering expenses. At the
time of the initial public offering, all of the Company's preferred stock
automatically converted into 4,694,333 shares of common stock.
Exchangeable Preferred Stock
In March 1999, the Company completed a private placement of 1,499,999
shares of exchangeable preferred stock at a price of $2.00 per share, providing
proceeds, net of expenses, of $2,840,775. The Company also issued the investor
warrants to acquire 420,000 shares of common stock at an exercise price of $2.14
per share in exchange for financial consulting services (Note 7). In addition,
the Company issued the placement agent in the offering warrants to acquire
185,490 shares of common stock at an exercise price of $4.08 per share (Note 7).
On August 15, 1999, the Exchangeable Preferred Stock automatically converted
into 1,499,999 shares of common stock.
Series A Convertible Preferred Stock
In June and July 1999, the Company completed a private placement of
4,694,333 shares of its Series A Convertible Preferred Stock (the "Series A
Stock") at $3.43 per share, providing proceeds, net of offering expenses, of
$15,290,021. In addition, the Company also issued the investors warrants to
acquire an aggregate of 938,888 shares of common stock at an exercise price of
$3.43 per share (Note 7). Additionally, the Company entered into a marketing and
distribution agreement with one investor who purchased 1,405,835 shares of the
Company's Series A Convertible Preferred Stock (Note 10). Each share of Series A
Convertible Preferred Stock converted into one share of common stock at the date
of the initial public offering.
Voting
Each share of common stock entitles the holder to one vote on all
matters submitted to a vote of the Company's stockholders.
Conversion
All shares of preferred stock converted into the equivalent number of
shares of common stock at the completion of the Company's March 2000 initial
public offering.
F-17
7. Warrants
In January and April 1998, and in connection with a private placement
of common stock, the Company issued warrants to acquire 571,669 shares of common
stock at an exercise price of $.36 per share and warrants to acquire 571,669
shares of common stock at an exercise price of $.86 per share as a finders fee.
The warrants were immediately exercisable and expire at various dates through
May 2003.
In January 1998, and in connection with the January 1998 private
placement of common stock, the Company issued warrants to acquire up to, in the
aggregate, 2,450,001 shares of its common stock at $.36 per share to all the
stockholders of record prior to the private placement. The warrants were issued
to stockholders on a pro rata basis to their stock holdings prior to the private
placement. Under the initial terms of the agreement, the vesting of these
warrants was contingent upon the Company reaching certain revenue targets for
the quarter ended June 30, 2000. In June 1999, the Company and the warrant
holders modified the terms of the warrant to (i) remove the revenue targets,
(ii) fix the aggregate number of shares at 2,450,001, and (iii) increase the
exercise price to $.97 per share. The Company has recorded compensation expense
in the amount of $3,878,000 based upon the difference between the fair value of
the Common Stock and the exercise price of the warrants at the time of
modification. In December 1999, warrants to acquire 52,500 shares of common
stock were exercised, providing gross proceeds of $51,000.
In September 1998, the Company issued warrants to acquire an aggregate
of 3,500 shares of common stock to consultants at an exercise price of $.43 per
share. The Company has recorded the estimated fair value of the warrants, in the
amount of $2,587, at the time of grant as consulting expense. The warrants are
exercisable through September 2008.
In March 1999, in connection with a private placement of Exchangeable
Preferred Stock, the Company entered into a six-month financial advisory
services agreement with the acquirer of the Exchangeable Preferred Stock. Under
the terms of the agreement, the Company issued the investor warrants to acquire
420,000 shares of common stock at an exercise price of $2.14 per share. The
warrants expire in February 2004. The Company has recorded the estimated fair
value of the warrants, in the amount of $493,320, as consulting expense.
In May 1999, in connection with a private placement of the Company's
common stock (Note 6), the Company issued the purchaser warrants to acquire
700,000 shares of common stock at an exercise price of $.01 per share. The
warrants are exercisable through May 2002.
In February, March, May and June 1999, the Company issued warrants to
acquire an aggregate of 45,749 shares of common stock to consultants at exercise
prices ranging from $.57 to $1.57 per share. The Company has recorded the
estimated fair value of the warrants, in the amount of $75,890, at the time of
grant as consulting expense. The warrants are exercisable through May 2009.
In March and May 1999, the Company issued warrants to acquire an
aggregate of 494,449 shares of common stock at an exercise price of $4.08 per
share as a fee for the March
F-18
1999 sale of Exchangeable Preferred Stock and the May 1999 sale of common stock.
The warrants expire in March and May 2004.
In June 1999, and in connection with a private placement of Series A
Convertible Preferred Stock, the Company issued the investors warrants to
acquire an aggregate of 938,888 shares of common stock at an exercise price of
$3.43 per share. The warrants are exercisable through June 2004.
In November 1999, the Company issued warrants to acquire 12,250 shares
of common stock to a consultant at an exercise price of $2.86 per share. The
Company has recorded the estimated fair value of the warrants, in the amount of
$151,928, at the time of grant as consulting expense. The warrants are
exercisable through November 2009.
The following table is a summary of the common shares issuable upon
exercise of warrants outstanding at December 31, 2000:
Shares Issuable Exercise Price
Issuance Date Expiration Date Upon Exercise Per Share
- ------------- --------------- ------------- ---------
January 1998 January 2003 175,000 $.36
January 1998 January 2003 175,000 $.86
January 1998 June 2005 2,319,898 $.97
April 1998 May 2003 213,680 $.36
April 1998 May 2003 184,920 $.86
September 1998 September 2008 3,500 $.43
March 1999 March 2009 5,250 $.57
March 1999 February 2004 420,000 $2.14
March 1999 March 2004 185,490 $4.08
May 1999 May 2002 700,000 $.01
May 1999 May 2009 5,250 $1.43
May 1999 May 2004 308,959 $4.08
June 1999 June 2009 5,250 $1.57
June 1999 June 2004 647,214 $3.43
November 1999 November 2009 12,250 $2.86
------ -----
Total shares and average exercise price 5,361,661 $1.47
========= =====
8. Stock Option Plans
2000 Stock Incentive Plan
The Company's 2000 Stock Incentive Plan (the "2000 Plan") supercedes
the 1997 and 1999 Stock Option Plans. The 1997 and 1999 Stock Option Plans have
been incorporated into the 2000 Plan, and no further grants will be under the
predecessor Plans. The 2000 Plan permits the grant of both incentive stock
options and non-qualified stock options. Incentive stock
F-19
options may only be granted to employees of the Company whereas non-qualified
stock options may be granted to non-employees, directors and consultants. The
maximum aggregate number of shares reserved for issuance under the 2000 Plan is
7,350,000. The share reserve is automatically increased on the first trading day
of each calendar year by a number of shares equal to 2% of the total number of
shares of common stock outstanding on the last trading day of the prior calendar
year. On January 1, 2001, the share reserve was increased by 735,408 shares. The
Compensation Committee determines the exercise price of the options. All
non-employee Board members who first join the Board of Directors on or after
January 26, 2000 are automatically granted an option to acquire 35,000 shares of
common stock, which vests over two years. In addition, each non-employee Board
member who does not, directly or indirectly (including through an affiliate),
own three percent of the Company's voting stock and who continues to serve as a
director after an annual stockholders meeting will receive an option grant to
purchase 5,250 shares of common stock, beginning with the first annual
stockholders meeting held after the initial 35,000-share grant is fully vested.
Each 5,250-share option grant will vest upon the optionee's completion of one
year of board service measured from the grant date.
Stock option activity under the 2000 Plan is summarized as follows:
Weighted
Average
Number Exercise
of Shares Price
--------- -----
Outstanding at December 31, 1997............. 35,000 $.17
Granted...................................... 745,850 .42
Exercised.................................... -- --
Forfeited.................................... (35,000) .17
-------- ---
Outstanding at December 31, 1998............. 745,850 .42
Granted...................................... 1,063,510 1.28
Exercised.................................... (175,000) .36
Forfeited.................................... (141,925) 1.12
--------- ----
Outstanding at December 31, 1999............. 1,492,435 1.01
Granted...................................... 3,501,674 23.81
Exercised.................................... (420,590) .84
Forfeited.................................... (999,087) 15.44
-------- -----
Outstanding at December 31, 2000............. 3,574,432 $19.00
========== ======
Options available for future grant........... 3,179,978
=========
F-20
The following table summarizes information about options outstanding under the
2000 Plan at December 31, 2000:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Number Average Weighted- Number Weighted
Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 2000 Life (Years) Price 2000 Price
---- ------------ ----- ---- -----
$.17-$.43 185,126 7.4 $.31 121,688 $.31
$.50-$.86 151,443 8.0 .70 82,750 .69
$1.00-$1.43 485,579 8.6 1.41 190,132 1.40
$5.44-$6.38 143,514 9.8 6.34 1,714 5.83
$7.63-$8.56 170,234 9.8 8.29 12,931 8.56
$12.86-$15.06 737,527 9.1 13.00 159,338 12.86
$24.00-$30.00 869,994 9.2 26.01 190,377 25.80
$33.60-$58.06 831,015 9.3 39.98 14,349 42.55
------- --- ----- ------ -----
3,574,432 9.0 $19.00 773,279 $10.42
========= === ====== ======= ======
In January 1998, the Company granted an aggregate of 1,750,000 non-plan
options to an officer and principal stockholder of the Company. 525,000 of such
options have an exercise price of $.17 per share and vested immediately. The
remaining 1,225,000 of such options vest over a period of 24 months and have the
following exercise prices: 350,000 are exercisable at $.46 per share, 350,000
are exercisable at $.86 per share and the remaining 525,000 are exercisable at
$1.71 per share. The Company has recorded compensation expense of $97,500 based
upon the difference between the exercise price and estimated fair value of the
common stock on the date of grant.
As permitted by SFAS No. 123. "Accounting for Stock-Based
Compensation", the Company accounts for its stock-based compensation
arrangements pursuant to APB Opinion No. 25, "Accounting for Stock Issued to
Employees." In accordance with the provisions of SFAS No. 123, the Company
discloses the pro forma effects of accounting for these arrangements using the
minimum value method to determine fair value. Based on the fair value of the
stock options at the grant date the Company's net loss would have been adjusted
to the pro forma amounts indicated below:
December 31,
------------
1998 1999 2000
---- ---- ----
Net income (loss)
As reported..................................... $(1,160,748) $(8,776,918) $269,808
Pro forma....................................... $(1,164,635) $(8,828,475) $(6,772,394)
Net earnings (loss) per share
As reported-basic............................... $(0.26) $(0.46) $0.01
As reported-diluted............................. $(0.26) $(0.46) $0.01
Pro forma basic................................. $(0.26) $(0.46) $(0.21)
Pro forma diluted............................... $(0.26) $(0.46) $(0.21)
Prior to completion of the Company's initial public offering in March
2000, the fair value of each option grant to employees was estimated using the
minimum value method of the Black-Scholes option-pricing model, which assumes no
volatility. The values were obtained using assumptions which were arrived using
information provided by management of the Company.
F-21
Changes in the information would affect the assumptions and the option prices
derived from the assumptions. The weighted average assumptions used for grants
made in 1998, 1999 and 2000 were as follows:
1998 1999 2000
---- ---- ----
Risk free interest rate........... 6.1% 5.5% 6.2%
Expected lives (years)............ 5.0 5.0 5.0
Expected dividends................ 0.0% 0.0% 0.0%
Volatility........................ -- -- 0% to 100.0%
In October 1998, the Company granted non-plan options to acquire 35,000
shares of the Company's common stock at exercise prices ranging from $.17 to
$.36 per share to a consultant for services rendered. The Company has recorded
the estimated fair value of the options on the date of grant, as determined
using the Black-Scholes option pricing model, of $26,300 as consulting expense.
The fair value of options and warrants (Note 7) granted to
non-employees is estimated using the Black-Scholes option-pricing model. The
values were obtained using assumptions, which were arrived using information
provided by management of the Company. Changes in the information would affect
the assumptions and the option prices derived from the assumptions. The weighted
average assumptions used for grants to non-employees made in 1998, 1999 and 2000
were as follows: risk free interest rate of 6.1%, 5.5% and 6.2%, respectively;
expected lives of 5 to 10 years based upon the term of the option or warrant;
expected dividends of 0% for each year; and a volatility of 100%.
F-22
The following table is a summary of the weighted average exercise price
and grant date fair values of options and warrants granted to employees and
consultants during the years ended December 31, 1998, 1999 and 2000:
1998 1999 2000
---- ---- ----
Exercise Fair Exercise Fair Exercise Fair
Price Value Price Value Price Value
----- ----- ----- ----- ----- -----
Options granted to employees
and consultants:
Exercise price less than fair
value of stock on date of
grant $0.27 $0.29 $1.28 $3.10 $12.86 $6.57
Exercise price equal to fair value
of stock on date of grant 0.40 0.01 -- -- 26.82 16.86
Exercise price greater than fair
value of stock on date of
grant 1.11 -- -- -- 24.17 2.10
Warrant grants to employees and
consultants for services:
Exercise price less than fair
value of stock on date of
grant $0.43 $0.74 $1.22 $3.93 $ -- $ --
Exercise price equal to fair value
of stock on date of grant 0.35 0.16 -- -- -- --
Exercise price greater than fair
value of stock on date of
grant -- -- 2.14 1.17 -- --
9. Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Plan") was adopted by
the board and approved by the stockholders on January 26, 2000 and became
effective on March 3, 2000, the date of the Company's initial public offering.
The Plan qualifies under Section 423 of the Code and provides substantially all
full time employees an opportunity to purchase shares of the Company's Common
Stock through payroll deductions of up to 10% of eligible compensation.
Semiannually, on May 1 and November 1, participant account balances are used to
purchase stock at the lesser of 85 percent of the fair market value of the
Company's common stock on the participant's entry date into the offering period
or the fair market value on the semi-annual purchase date. A total of 350,000
shares were initially reserved for purchase under the Plan. The share reserve is
automatically increased on the first trading day of January of each year
beginning in January 2001, by 0.25% of the total shares of common stock
outstanding on the last trading day of the prior calendar year. On January 1,
2001, the share reserve was increased by 91,926 shares. For the year ended
December 31, 2000, 33,619 shares were purchased under the Plan.
10. Related Party Transactions
XO Communications, Inc.
In June 1999, the Company entered into a marketing and distribution
agreement with XO Communications, Inc. ("XO"), formerly, Concentric Network
Corporation. This agreement was
F-23
amended in June and July of 2000. Under the terms of the agreement, as amended,
XO has agreed to purchase advertising from the Company in minimum amounts that
range over the term of the agreement and XO has the right to terminate the
agreement if certain performance metrics are not met with respect to the
advertising. In June 1999, XO also purchased 1,405,835 shares of the Company's
Series A Convertible Preferred Stock (Note 6).
Staples
In May 1999, we entered into a cooperative marketing agreement with
Staples. The initial term of the agreement ends on May 31, 2002, but
automatically renews for consecutive one-year terms unless terminated by either
party upon 60 days' written notice. No cash payments are required to be paid by
either Staples or us under this cooperative marketing agreement. In May 1999, we
sold 2,041,666 shares of our common stock to Staples, Inc. at a price of $3.43
per share. In connection with the transaction, we issued to Staples warrants to
purchase up to 700,000 shares of our common stock at an exercise price of
$0.0029.
Booz Allen & Hamilton Inc.
In October 2000, the Company entered into a consulting arrangement with
Booz Allen & Hamilton Inc. ("Booz Allen"). Under the terms of this agreement,
Booz Allen provided the Company with consulting services over a ten week period
for a fee of $550,000. Reginald Van Lee, a member of the Company's Board of
Directors, is a Partner at Booz Allen.
11. Income Taxes
Net operating loss carryforwards and temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax asset of $1,206,744, $11,921,024, and
$23,315,073 at December 31, 1998, 1999 and 2000, respectively. The Company's
operating plans anticipate taxable income in future periods; however, such plans
make significant assumptions which cannot be reasonably assured. Therefore, in
consideration of the Company's accumulated losses and the uncertainty of its
ability to utilize the deferred tax asset in the future, the Company has
recorded a valuation allowance in the amount of, $1,206,744, $3,342,979, and
$2,560,772 at December 31, 1998, 1999, and 2000, respectively, to offset the
deferred tax benefit amount.
F-24
The provision for income taxes for the years ended December 31, 1998, 1999, and
2000 consists of the following:
December 31,
------------
1998 1999 2000
---- ---- ----
Current:
Federal.......................................... $-- $ 5,210,244 $ 10,980,078
State............................................ -- 3,367,801 3,670,304
-- ------------ ------------
Total current.................................... -- 8,578,045 14,650,382
-- ------------ ------------
Deferred:
Federal.......................................... -- (5,210,244) (8,767,397)
State............................................ -- (3,367,801) (1,696,327)
-- ------------ ------------
Total deferred................................... -- (8,578,045) (10,463,724)
-- ------------ ------------
Total provision for income taxes................. $-- $ -- $ 4,186,658
=== ============ ============
The components of the net deferred tax asset as of December 31, 1998, 1999, and
2000 consist of the following:
December 31,
------------
1998 1999 2000
---- ---- ----
Deferred tax assets:
Operating loss carryforward.......................... $982,066 $-- $--
Allowance for doubtful accounts...................... 29,620 144,070 769,482
Accrued expenses..................................... 121,137 472,264 65,895
Stock compensation................................... -- 547,551 439,308
Deferred revenue..................................... 50,990 14,704,541 29,589,348
----------- ---------- ----------
Total deferred tax assets............................ 1,183,813 15,868,426 30,864,033
Deferred tax liabilities:
Prepaid domain name registry fees.................... -- 3,907,804 7,009,755
Depreciation and amortization........................ (22,931) 39,598 370,236
Unrealized gain..................................... -- -- 168,969
----------- ---------- -----------
Total deferred tax liabilities....................... (22,931) 3,947,402 7,548,960
Net deferred tax asset............................... 1,206,744 11,921,024 23,315,073
Less: valuation allowance............................ (1,206,744) (3,342,979) (2,560,772)
----------- ---------- -----------
Deferred tax asset, net.............................. $ -- $8,578,045 $20,754,301
=========== ========== ===========
F-25
The financial statement income tax provision differs from income taxes
determined by applying the statutory Federal income tax rate to the financial
statement net loss for the years ended December 31, 1998, 1999, and 2000 as a
result of the following:
December 31,
------------
1998 1999 2000
---- ---- ----
Tax benefit at Federal statutory rate.............................. (34.0)% (35.0)% 35.0%
State income tax benefit, net of Federal tax charge................ (8.0) (11.8) 4.0
Non-deductible compensation expenses............................... .1 15.5 -
Non-deductible goodwill amortization............................... -- -- 79.7
Valuation allowance................................................ 41.9 31.3 (24.8)
---- ---- -----
--% --% 93.9%
=== === =====
12. Commitments
Operating leases
The Company leases office facilities under operating leases expiring
through 2009. Future minimum lease payments due under non-cancelable operating
leases and capital leases were as follows:
Operating
Year ending December 31,
2001............................................. $641,140
2002............................................. 660,375
2003............................................. 680,185
2004............................................. 705,590
2005............................................. 741,758
Thereafter....................................... 2,983,701
---------
Total minimum lease payments..................... $6,412,749
==========
Rent expense for the years ended December 31, 1998, 1999 and 2000 was
approximately $43,000, $220,000 and $433,000, respectively.
Employment agreements
In the normal course of business, the Company enters into employment
agreements with certain executives of the company.
13. Acquisitions
In June 2000, the Company, through a newly formed wholly-owned
subsidiary, acquired all of the outstanding capital stock of Inabox, Inc. for
approximately $1.0 million cash and 280,019 shares of the Company's common
stock. The total value of the transaction at the time of the acquisition was
approximately $11.7 million. The acquisition has been accounted for
F-26
using the purchase method of accounting, and accordingly the purchase price has
been allocated to assets acquired and liabilities assumed based on their
respective fair values. Intangible assets, representing the unallocated excess
of purchase price, plus transaction expenses, over the net assets acquired and
liabilities assumed based on their respective fair values. Intangible assets,
representing the unallocated excess of purchase price, plus transaction
expenses, over the net assets acquired, of approximately $11.6 million has been
allocated to goodwill and other intangibles and is being amortized on a
straight-line basis over a period of 39 months.
In September 2000, the Company, through a newly formed wholly-owned
subsidiary, acquired Afternic.com, Inc. for approximately $10.0 million cash and
the issuance of 4,378,289 shares of our common stock to the stockholders of
Afternic.com, a portion of which cash and stock was used to satisfy existing
obligations of Afternic.com. The total value of the transaction at the time of
the acquisition was approximately $47.9 million. The acquisition has been
accounted for using the purchase method of accounting, and accordingly, the
purchase price has been allocated to assets acquired and liabilities assumed
based on their respective fair values. Intangible assets, representing the
unallocated excess of purchase price, plus transaction expenses, over the net
assets acquired, of approximately $47.9 million has been allocated to goodwill
and other intangibles and is being amortized on a straight-line basis over a
period of 48 months.
The following is a summary of all consideration paid for the
acquisitions of Inabox, Inc. and Afternic.com, Inc. during the year ended
December 31, 2000:
Fair value of common stock issued $47,621,031
Cash paid 10,933,553
Transaction costs 1,009,374
--------------------
Total purchase price $59,563,958
====================
The assets and the liabilities of the acquired entities were recorded at their
estimated fair market value at the date of acquisition. The allocations were as
follows:
Current assets, net $ 132,943
Goodwill and other intangibles, net 59,431,015
---------------------
Total purchase price $59,563,958
=====================
14. Contingencies
Litigation
There are various claims, lawsuits and pending actions against the
Company incidental to the operations of its business. It is the opinion of
management, after consultation with counsel, that the ultimate resolution of
such claims, lawsuits and pending actions will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
F-27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Register.com, Inc.
In connection with our audits of the financial statements of Register.com, Inc.
as of December 31, 1999 and 2000 and for each of the three years in the period
ended December 31,2000, which financial statements are included in the Form
10-K, we have also audited the financial statement schedule listed in Part II
herein.
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
PricewaterhouseCoopers LLP
New York, New York
February 16, 2001
S-1
Schedule II - Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Deductions Period
For the year ended December 31, 1998:
Provision for doubtful accounts $ 20,764 $ 72,232 $ 27,049 $ 65,947
================= ================ ================= =================
For the year ended December 31, 1999:
Provision for doubtful accounts $ 65,947 $ 536,585 $ 288,016 $ 314,516
================= ================ ================= =================
For the year ended December 31, 2000:
Provision for doubtful accounts $ 314,516 $ 1,434,308 $ - $ 1,748,824
================= ================ ================= =================
S-2
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference from the information in our proxy statement
for the 2001 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
Item 11. Executive Compensation.
Incorporated by reference from the information in our proxy statement
for the 2001 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference from the information in our proxy statement
for the 2001 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference from the information in our proxy statement
for the 2001 Annual Meeting of Stockholders which we will file with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
to which this report relates.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Consolidated Financial Statements.
The financial statements as set forth under Item 8 of
this report are incorporated by reference.
2. Financial Statement Schedules.
The Valuation and Qualifying Account Schedule as set
forth under Item 8 of this report is incorporated by
reference.
57
3. Exhibits.
The following Exhibits are incorporated herein by
reference or are filed with this report as indicated
below.
Exhibit Number Description
2.1++ Agreement and Plan of Merger and Reorganization, dated as of September 15, 2000, by and among
Register.com, Inc., RCOM Acquisition Corp. II, Afternic.com, Inc., eXtraActive Incorporated and
the Stockholders of Afternic.com, Inc. identified on Schedule 1 thereto.
3.1@ Amended and Restated Certificate of Incorporation.
3.2## Certificate of Correction of Amended and Restated Certificate of Incorporation.
3.3o Amended and Restated Bylaws.
4.1* Specimen common stock certificate.
4.2* See Exhibits 3.1, 3.2, and 3.3 for provisions of the certificate of incorporation and bylaws
defining the rights of holders of Common Stock.
4.3.1** Registration Rights Agreement dated June 30, 1999.
4.3.2+ Registration Rights Agreement dated June 4, 2000.
4.3.3++ Registration Rights Agreement dated September 15, 2000.
4.4* Amended and Restated Stockholders Agreement.
4.5* Certificate of designations, preferences and relative, participating, optional and other special
rights of preferred stock and qualifications, limitations and restrictions of Series A
Convertible Preferred Stock.
4.6.1* Form of warrant to purchase common stock issued to Series A Convertible Preferred Stockholders.
4.6.2* Warrant to purchase common stock issued to Staples, Inc.
4.6.3* Warrant to purchase common stock issued to Palisade Private Partnership, LP.
4.6.4* Form of warrant to purchase common stock issued to Niles H. Cohen and Zachary Prensky.
4.6.5* Form of Amended and Restated Common Stock Purchase Warrant -- Series A issued to Richard D.
Forman, Peter A. Forman, Dan Levine and Capital Express LLC.
4.6.6* Warrants to purchase common stock issued to Legg Mason Wood Walker, Incorporated.
4.6.7* Form of warrant to purchase common stock issued to consultants.
4.6.8* Warrant to purchase common stock issued to Terrence Kaliner.
4.7.1* Employee Stock Option Certificate issued to Richard D. Forman.
4.7.2* Stock Option Certificate issued to Pondfield Associates, Inc.
10.1* 1997 Stock Option Plan.
10.2* 1999 Stock Option Plan.
10.3.1+++ Registrar Accreditation Agreement, dated November 30, 1999, by and between ICANN and
Register.com, Inc.
10.3.2+ Registrar Accreditation Agreement, dated April 27, 2000, by and between ICANN and Register.com,
Inc.
10.4* Registrar License and Agreement, dated December 13, 1999, by and between Network Solutions, Inc.
and Register.com, Inc.
58
Exhibit Number Description
10.5* Lease between Pennbus Realties, Inc. and Forman Interactive Corp.
10.6* 2000 Stock Incentive Plan.
10.7* Employee Stock Purchase Plan.
10.8* Employment Agreement, dated November 15, 1995, with Richard D. Forman.
10.8.2* Employment Agreement, dated February 27, 2000, with Richard D. Forman.
10.9* Employment Agreement with Jack S. Levy.
10.10* Marketing Agreement, dated as of May 21, 1999, with Staples, Inc.
10.11.1# Joint Marketing and Distribution Agreement, dated as of June 25, 1999, with Concentric Network
Corporation.
10.11.2+ Amendment No. 1, dated as of June 30, 2000, with Concentric Network Corporation.
10.12.1* Lock Up and Voting Agreement, dated February 2, 2000, by and between Register.com, Inc. and
Staples, Inc.
10.12.2* Lock Up and Voting Agreement, dated February 28, 2000, by and between Register.com, Inc. and
Staples, Inc.
10.13* Letter Agreement, dated January 31, 2000, with Internet Web Builders LLC and Kenneth R. Greif.
10.14 Offer Letter, dated March 12, 2001, with Rene M. Mathis.
21.1 Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
- ----------------
* Incorporated by reference to the identically numbered exhibit of
Registration Statement No. 333-93533.
@ Incorporated by reference to Exhibit 3.2 of Registration Statement
No. 333-93533.
o Incorporated by reference to Exhibit 3.4 of Registration Statement
No. 333-93533.
** Incorporated by reference to Exhibit 4.3 of Registration Statement
No. 333-93533.
# Incorporated by reference to Exhibit 10.11 of Registration Statement
No. 333-93533.
## Incorporated by reference to the identically numbered exhibit of
Registrant's Quarterly Report on Form 10-Q filed for the quarter
ended March 31, 2000.
+ Incorporated by reference to the identically numbered exhibit of
Registrant's Quarterly Report on Form 10-Q filed for the quarter
ended June 30, 2000.
++ Incorporated by reference to the identically numbered exhibit of
Registrant Current Report on Form 8-K dated September 29, 2000.
+++ Incorporated by reference to Exhibit 10.3 of Registration Statement
No. 333-93533.
(b) Reports on Form 8-K
On November 29, 2000, we filed a Current Report on Form 8-K/A, Item 7
amending our Current Report on Form 8-K filed on September 29, 2000 in
connection with the acquisition of all of the outstanding stock of Afternic.com,
Inc. on September 15, 2000. The amended form contained certain audited financial
information for Afternic and pro forma financial information for the Registrant.
59
On December 6, 2000 we filed a Current Report on Form 8-K, Item 5
announcing the employment of Arthur Goldberg as our interim Chief Financial
Officer.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Register.com, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on this 28th day of March, 2001.
REGISTER.COM, INC.
By: /s/ Richard D. Forman
-------------------------------------
Richard D. Forman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title
--------- -----
/s/ Richard D. Forman
- -------------------------------------------
Richard D. Forman President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Glenn Story
- -------------------------------------------
Glenn Story Corporate Controller (Principal Accounting and
Financial Officer)
/s/ Peter A. Forman
- -------------------------------------------
Peter A. Forman Director
/s/ Niles H. Cohen
- -------------------------------------------
Niles H. Cohen Director
/s/ Samantha McCuen
- -------------------------------------------
Samatha McCuen Director
61
/s/ Mark S. Hoffman
- -------------------------------------------
Mark S. Hoffman Director
/s/ Reginald Van Lee
- -------------------------------------------
Reginald Van Lee Director
/s/ Jim Rosenthal
- -------------------------------------------
Jim Rosenthal Director
62
EXHIBIT INDEX
Exhibit
Number Description
2.1++ Agreement and Plan of Merger and Reorganization, dated as of September 15, 2000, by and among
Register.com, Inc., RCOM Acquisition Corp. II, Afternic.com, Inc., eXtraActive Incorporated and
the Stockholders of Afternic.com, Inc. identified on Schedule 1 thereto.
3.1@ Amended and Restated Certificate of Incorporation.
3.2## Certificate of Correction of Amended and Restated Certificate of Incorporation.
3.3o Amended and Restated Bylaws.
4.1* Specimen common stock certificate.
4.2* See Exhibits 3.1, 3.2, and 3.3 for provisions of the certificate of incorporation and bylaws
defining the rights of holders of Common Stock.
4.3.1** Registration Rights Agreement dated June 30, 1999.
4.3.2+ Registration Rights Agreement dated June 4, 2000.
4.3.3++ Registration Rights Agreement dated September 15, 2000.
4.4* Amended and Restated Stockholders Agreement.
4.5* Certificate of designations, preferences and relative, participating, optional and other special
rights of preferred stock and qualifications, limitations and restrictions of Series A
Convertible Preferred Stock.
4.6.1* Form of warrant to purchase common stock issued to Series A Convertible Preferred Stockholders.
4.6.2* Warrant to purchase common stock issued to Staples, Inc.
4.6.3* Warrant to purchase common stock issued to Palisade Private Partnership, LP.
4.6.4* Form of warrant to purchase common stock issued to Niles H. Cohen and Zachary Prensky.
4.6.5* Form of Amended and Restated Common Stock Purchase Warrant -- Series A issued to Richard D.
Forman, Peter A. Forman, Dan Levine and Capital Express LLC.
4.6.6* Warrants to purchase common stock issued to Legg Mason Wood Walker, Incorporated.
4.6.7* Form of warrant to purchase common stock issued to consultants.
4.6.8* Warrant to purchase common stock issued to Terrence Kaliner.
4.7.1* Employee Stock Option Certificate issued to Richard D. Forman.
4.7.2* Stock Option Certificate issued to Pondfield Associates, Inc.
10.1* 1997 Stock Option Plan.
10.2* 1999 Stock Option Plan.
10.3.1+++ Registrar Accreditation Agreement, dated November 30, 1999, by and between ICANN and
Register.com, Inc.
10.3.2+ Registrar Accreditation Agreement, dated April 27, 2000, by and between ICANN and Register.com,
Inc.
10.4* Registrar License and Agreement, dated December 13, 1999, by and between Network Solutions, Inc.
and Register.com, Inc.
10.5* Lease between Pennbus Realties, Inc. and Forman Interactive Corp.
63
Exhibit
Number Description
10.6* 2000 Stock Incentive Plan.
10.7* Employee Stock Purchase Plan.
10.8* Employment Agreement, dated November 15, 1995, with Richard D. Forman.
10.8.2* Employment Agreement, dated February 27, 2000, with Richard D. Forman.
10.9* Employment Agreement with Jack S. Levy.
10.10* Marketing Agreement, dated as of May 21, 1999, with Staples, Inc.
10.11.1# Joint Marketing and Distribution Agreement, dated as of June 25, 1999, with Concentric Network
Corporation.
10.11.2+ Amendment No. 1, dated as of June 30, 2000, with Concentric Network Corporation.
10.12.1* Lock Up and Voting Agreement, dated February 2, 2000, by and between Register.com, Inc. and
Staples, Inc.
10.12.2* Lock Up and Voting Agreement, dated February 28, 2000, by and between Register.com, Inc. and
Staples, Inc.
10.13* Letter Agreement, dated January 31, 2000, with Internet Web Builders LLC and Kenneth R. Greif.
10.14 Offer Letter, dated March 12, 2001, with Rene M. Mathis.
21.1 Subsidiaries of Registrar.
23.1 Consent of PricewaterhouseCoopers LLP.
- ---------------------
* Incorporated by reference to the identically numbered exhibit of
Registration Statement No. 333-93533.
@ Incorporated by reference to Exhibit 3.2 of Registration Statement
No. 333-93533.
o Incorporated by reference to Exhibit 3.4 of Registration Statement
No. 333-93533.
** Incorporated by reference to Exhibit 4.3 of Registration Statement
No. 333-93533.
# Incorporated by reference to Exhibit 10.11 of Registration Statement
No. 333-93533.
## Incorporated by reference to the identically numbered exhibit of
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000.
+ Incorporated by reference to the identically numbered exhibit of
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000.
++ Incorporated by reference to the identically numbered exhibit of
Registrant's Current Report on Form 8-K dated September 29, 2000.
+++ Incorporated by reference to Exhibit 10.3 of Registration Statement
No. 333-93533.
64